Ethiopia’s outlook turns sour as war rages on

As rebel forces in Ethiopia’s Tigray region claim a series of battlefield gains this week, the ongoing conflict is putting further pressure on an economy that is already battered by Covid-19.

A spokesman for the Tigray Defence Force (TDF) said on Tuesday that fighters had recaptured the towns of Korem and Alamata in southern Tigray just two weeks after ousted rebels marched into the regional capital Mekelle.

Tigray rebels laid out seven demands for their acceptance of Prime Minister Abiy Ahmed’s unliteral call for a ceasefire, making an end to the conflict look increasingly unlikely.

The conflict is the result of mounting tensions between the former ruling elite, the Tigray People’s Liberation Front (TPLF), and Abiy Ahmed, who has championed an anti-federal agenda since coming to power in 2018.

The wages of war

Two weeks ago, the government revealed that rehabilitation work and the humanitarian response to the conflict had cost around $2.2bn, notwithstanding the enormous pressure that military expenditure has put on state resources.

In the first six months of this year, military expenditure almost exceeded the entire budget allocation for the fiscal year.

Ethiopia also recently shut down 30 foreign embassies, including Kenya, one of the country’s most important neighbours, in a sign that the government was under financial pressure. Abiy reportedly directed politicians to drive themselves to work rather than take chauffeured cabs.

Once heralded as Ethiopia’s great economic reformer, the Nobel prize winner’s promises to transform the economy and bring broad-based growth to Africa’s second most populous nation are unravelling.

Ethiopia’s recent election, though widely regarded as flawed, may help the ruling Prosperity Party drive some reforms home, analysts say.

The National Election Board announced on Saturday that Abiy’s party had won 410 out of 436 seats in federal parliament, giving the 44-year-old prime minister ample room to legislate.

Patrick Heinisch, economic researcher at Germany-based commercial bank Helaba, says the immediate focus will be on resolving debt issues at state-owned enterprises and following up on the privatisation programme.

“However, as long as the domestic security situation remains precarious, investor confidence is unlikely to rebound,” he adds.

The recent disappointment of a licensing round for two telecoms licenses is a prime example, he says.

“Ethiopia previously had hoped to sell each of the two licenses at $1bn but only obtained offers of $800m (Safaricom) and $600 (MTN). The MTN offer was rejected all-out.”

Ethiopia’s potentially lucrative telecoms market had been eyed for years by international and Africa-based operators who saw it as untapped high-growth market.

The discrepancy between the Ethiopian government’s valuation and the bidders’ prices shows a huge dent in investor confidence as the war in Tigray rages on.

“Ethiopia just cannot wait for the domestic security situation to improve because they need dollars now,” Heinisch says.

Indeed, Ethiopia imports far more than it exports, leading to a crushing foreign exchange that makes it almost impossible for businesses to secure the currency they need to maintain operations.

On top of that Ethiopia owes around $30bn in debt, mostly to China, with $2bn owed to creditors this year which Addis Ababa has so far failed to renegotiate.

Covid-19 is also putting huge downward pressure on the economy, effectively shackling Ethiopia’s largest company and biggest foreign exchange earner Ethiopian Airlines.

In this context, many analysts believe that the IMF’s prediction of 8.7% growth in 2021 is unrealistic.

“The IMF estimates growth at around 2% in the past fiscal year 2020/2021, a significant drop from the 6.1% recorded in the previous fiscal year, and way below the average of almost 10% per annum over the period 2010-2019,” says Heinisch.

“However, given the recent intensification and escalation of the Tigray conflict following the unilateral ceasefire, I think this expectation can no longer be upheld. Growth is more likely to reach something between 6% and 7%.”