Ethiopia’s Prime Minister Abiy Ahmed said this month that his government would negotiate with fighters in the northern region of Tigray to end a war that has unleashed not only human rights violations and killed thousands but also one of Derailed Africa’s most promising economies.
Until the outbreak of civil war in November 2020, Ethiopia — Africa’s second most populous country with a population of 114 million — was regarded by development economists as a success story, albeit developed by an authoritarian government.
In the 15 years to 2019, the economy, driven by investment in agriculture, industry and infrastructure, grew at an average of 7 percent per year per capita, according to World Bank data, one of the fastest in the world. While it was still relatively poor, with a nominal gross domestic product per capita of about $1021 in 2019, years of growth had put it on the brink of a lower-middle-income status.
“There is no doubt that Ethiopia has made huge gains from the development-state approach,” said Kingsley Amoako, former executive secretary of the UN’s Economic Commission for Africa, referring to the country’s Asian-inspired state-led model.
Having been an economic and foreign direct investment outperformer in Sub-Saharan Africa over 2004-2019, Ethiopia’s economy has stuttered since the onset of civil war in the country in November 2020. Previously the leading economic power in the Horn of Africa, Ethiopia’s growth slowed to the lowest rate in nearly two decades in 2021.
Ethiopia’s unfinished economic miracle seemed all but dead as the war caused an estimated “billions of dollars” in lost growth and destroyed roads, factories and airports. The conflict also broke a fragile political truce that saw the country’s main ethnic groups, for nearly 30 years under the strict control of a coalition led by the Tigray People’s Liberation Front, set aside their differences in the interest of national development. A fighter loyal to the Tigray People’s Liberation Front © Ben Curtis/AP
The economy received a further shock when, after war broke out in 2020, foreign donors withdrew billions of dollars in financial aid. Last year, Washington further tightened sanctions, ending Ethiopia’s tariff-free access to the US market and threatening thousands of jobs in a burgeoning textile industry.
Now, however, the prospect of peace talks has raised hopes – however cautious – that Ethiopia’s economic momentum can be restored. “We’re going to slow down before we go back up,” said Tewodros Mekonnen, an economist in Addis Ababa. If the conflict can be resolved permanently, he said, the economy could recover.
A permanent ceasefire could unlock more than $4 billion in frozen funding, officials say and reduce a crippling foreign exchange shortage that plagued the economy even before the war started. “There is no economy without peace,” said Abie Sano, president of the state-owned Commercial Bank of Ethiopia, the country’s largest lender.
Still, given the intensity of the war and the impact of the coronavirus, Ethiopia performed better than many expected. The Ethiopian economy is projected to have grown by 8.7 percent in the 2021/22 fiscal year, according to the latest annual economic report of the central bank of Ethiopia, below the level of previous years, but much higher than the continental average.
While some have questioned the reliability of that data, Stefan Dercon, an economic policy professor at Oxford University and an expert on Ethiopia, said GDP measures the flow of income and doesn’t immediately record the impact of assets destroyed. Spending on the war itself could actually boost economic activity in the short term, he added.
“Despite appearances, the conflict remained relatively localized,” Dercon said;
“So large areas of the country were just as stable or unstable as they were in previous decades when you were experiencing rapid growth.”
Ahmed Shide, Ethiopia’s finance minister, told the Financial Times that the economy struggled with “multiple challenges and shocks, both internal and external”. But, he said, it continued to benefit from strong fundamentals, the good performance of Ethiopian Airlines, Africas largest airline and the liberalization of the telecom sector. “The economy is resilient despite multiple shocks,” Shide said.
Looking in to 2022, our analysts forecast that Ethiopia’s growth will accelerate again after losing momentum in 2020-21, but this recovery will be fragile. Persisting political challenges will hold back economic growth and major sectors will continue to underperform. We expect policymaking, and the homegrown economic reform agenda, to be obstructed by the ongoing conflict in Tigray and by rising incidents of inter‑ethnic violence across the country.
In 2022 the government will prioritise securing debt restructuring under a G20 framework and with its bilateral partner, China, as well as a new extended credit facility (ECF) with the IMF.
The prime minister, Abiy Ahmed, will continue to respond with aggression to any attempt by the Tigray People’s Liberation Front (TPLF, a former ruling regional party turned rebel group) to destablise his government. We therefore expect deployment of military troops to continue in some areas (especially two northern states, Afar and Amhara).
Although the situation for this year expected to be more difficult, the Annual Growth Rate of the country is expected to reach 9.00 percent by the end of 2022, according to Trading Economics global macro models and analysts expectations. In the long-term, the Ethiopia GDP Annual Growth Rate is projected to trend around 6.80 percent in 2023 and 7.00 percent in 2024, according to the econometric models. Inflation is expected to reach 35 percent, fueled by local and global supply chain problems.
For the economy to recover, Sano said it is essential that the government push ahead with liberalization.
Before the war, Ethiopia had started selling new telecom licenses in Tigray. Last year, it accepted an $850 million bid from a British-backed consortium led by Safaricom, a Kenyan operator. The government is considering a partial sale of state assets, including a second telecom license and a stake in the state operator Ethio Telecom, as well as parts of logistics operations such as Ethiopian Shipping Lines. “We need capital and to have capital we need reforms,” Sano said.
Under the late Meles Zenawi, a former Tigrayan guerrilla fighter and national leader until his death in 2012, the state dominated the economy. “We had impressive growth, but if you parse it, it was very clearly public sector driven, which was not sustainable,” Tewodros said. “We need to balance some of our public investment by bringing in the private sector.”
While Ethiopia financed much of its spending with domestic savings, it also borrowed from foreign lenders, including China. Last year, Addis sought debt relief under a G20 framework to help countries hit by the Covid-19 pandemic.
The government recently launched what it hopes will be a $150 billion sovereign wealth fund and plans to open the country’s first stock market next year, Ahmed said:
“We want to build a progressive capitalism that will harness both the power of the market and the sustainable role of the state.”
Ethiopia’s international relations will present a mixed picture. Relations with China will remain strong, underpinned by Chinese funding of infrastructure projects. However, an increased humanitarian crisis fuelled by an ongoing civil conflict will strain relations with Western countries.
Negotiations over the Grand Ethiopian Renaissance Dam (GERD) will intermittently stoke tensions between Ethiopia and Egypt. Given the latest political developments in Sudan, fragile recovery in Egypt and ongoing conflict in Ethiopia, the appetite for military confrontation among the countries along the Nile will be minimal.
Violence in several regions continues and the constitutional issues that fueled the war in Tigray have not been resolved. It will be difficult, analysts say, for Abiy to forge lasting peace with Tigray, which is still partially blocked, or to convince the TPLF to accept market reforms that will slowly unravel the state-led model it pioneered.
“Abiy came for revenge, not reform,” said Kindeya Gebrehiwot, former president of Mekelle University and a senior member of the TPLF. “Development requires serious thinking, planning and getting everyone on board,” he said. “All the initiatives he has taken are harmful to national harmony.”
Mamo Mihretu, a top economic adviser to Abiy, said the government’s market reforms remained on track. Successive shocks have not diminished our determination to build an economic model that can solve legacy challenges, he said.
Dercon at Oxford said it was too early to write off Ethiopia’s economy. “It’s not that the economic miracle has disappeared, but the economic model has disappeared,” he said, referring to state-led development. “Will it come back to 7-10 percent growth? I don’t know,” he said. “But to give up and say it won’t grow at all, I don’t think so.”