Ethiopia’s economy burdened by Tigray conflict

The war’s high costs burdened Ethiopia’s economy, particularly following the pandemic’s slowdown hitting global economies in the last two years.

  • Ethiopia’s way out of the current economic crisis seems to hinge on the security and political stability across the country.
  • Ethiopia’s security and political developments undoubtedly caused a fast-paced economic deterioration that slowed economic growth.
  • The hope for stability in Ethiopia is key to ensuring the Horn of Africa’s peace and security.

Security and stability effect on Ethiopia’s economy

The Tigray conflict threatened the sustainability of Ethiopia’s economy with concerns over the government’s ability to pay off mounting debt. With the economy taking a hit, the security crisis massively impacted food security, human development, employment, inflation rates, education and health and complicated an already worsening refugee crisis.

Ethiopia’s way out of the current economic crisis seems to hinge on the security and political stability across the country, a condition for making necessary measures to resolve the economic turmoil. Now that the warring sides have resolved to end the Tigray conflict, the Ethiopian government needs to adopt a strategy to cut the economic losses and put the nation back on the growth path.

The Ethiopian government must introduce plans for emergency aid and direct support to the groups most affected by the war. In this venture, the government should seek the help of international organizations already operating in Ethiopia.

On November 2, 2022, in Pretoria, South Africa, The Ethiopian government and the Tigray People’s Liberation Front (TPLF) agreed on a ceasefire to hostilities. Since November 2020, the prevalence of conflict in Ethiopia has significantly affected lives, livelihoods, and infrastructure, further exacerbating the already complex economic situation in the Horn of Africa nation. In a decade, Ethiopia is witnessing the highest inflation rate, foreign currency restrictions, and rising debt.

READ MORE: Ethiopia’s economy to recover to 8% in 2022

The conflict that undermined Ethiopia’s economy

Tigray conflict and Ethiopia's economy
The Tigray conflict burdened Ethiopia’s economy over the last two years. [Photo/Nationalia]

Ethiopia’s security and political developments undoubtedly caused a fast-paced economic deterioration that slowed economic growth. The economic slump, mirrored in the domestic and foreign performance indicators, led to a decline in the standards of living for Ethiopians.

The war’s heavy costs burdened Ethiopia’s economy, particularly following the pandemic’s slowdown hitting global economies in the last two years. With trillions of dollars consumed, the IMF’s GDP forecast for Ethiopia dropped to 3.8 per cent for FY2022/23. This was a drop from 6.2 per cent when the conflict erupted in 2020.

Ethiopia’s government, in particular, lacked access to external financing after its external debt hit the limit of $28 billion. The IMF withheld a three-billion-dollar loan following the Tigray conflict. The IMF’s Extended Credit Facility (ECF) and Extended Fund Facility (EFF) windows for Ethiopia were also phased out.

Growth slowdown amid surging inflation

Ethiopia’s government spent considerable amounts from their budget on the war effort. Earlier this year, Parliament allegedly authorized a budget increase of $1.7 billion for defence. According to the Secretary-General of the United Nations, Antonio Guterres’s conflict in Ethiopia drained over $1 billion from the nation’s coffers, including military spending.

The months-long Tigray conflict lowered the economic growth to less than 2 per cent in 2021. This was the lowest growth in more than two decades. The economic impact of the war was not limited to the Tigray region. Its spill-over affected all other regions impacting agriculture, mining and manufacturing output.

With the continued deterioration of Ethiopia’s economy, the Central Bank banned all lending and transfers of money and any coverage for direct imports. The move primarily contributed to a currency crisis and a shortage of foreign reserves.

Consequently, the official exchange rate of the local birr currency, and the black-market exchange rate, dropped significantly. The USDbirr exchange rate dropped to an average of 51 after the local currency traded 45 to the dollar in 2020. Parallel market rates shot up to as high as 75 against the dollar, mainly after the government resolved to mobilize the public to fight against the TPLF .

Surging inflation

Ethiopia’s inflation rate soared to 33.6 per cent in 2022, the highest level in a decade. Food prices spiked 43.9 per cent in May 2022, threatening food security and the living standards of Ethiopians, further making worse poverty and unemployment expected to reach 23 per cent by the end of 2022.

The surging inflation rate can be attributed to the government raising military spending, causing a budget deficit with tax revenues dropping to less than 9 per cent of the GDP. Furthermore, the security situation affected agriculture and industries across the country, disrupting essential food supplies.

The Food and Agriculture Organization (FAO) estimates that 2.1 million people were internally displaced due to the war. The FAO has estimated that the Ethiopian humanitarian crisis needed an estimated $30 million to resolve.

The conflict in Ethiopia had a direct impact on the country’s foreign trade. Every month during the conflict, Ethiopia lost up to $20 million in export revenue following the shutdown of industrial facilities in the Tigray region, according to figures from the Ethiopian Ministry of Trade and Industry. The annual revenue is estimated at $7.3 billion.

After the political and security situation worsened, the war scared investors away from the Ethiopian market. Consequently, investments in the Tigray bore the brunt of the war. Many factories and mines shut down across the region.

Global companies closed their operations in Ethiopia. Global fashion giant PVH Corp. the biggest factory in Ethiopia’s classical industrial park in Hawassa closed its manufacturing facility. The decision by the US Administration to suspend Ethiopia as a member of the African Growth and Opportunity Act (AGOA) owing to gross human rights violations during the conflict informed the company’s decision.

Ethiopia’s economy post-conflict recovery

Undoubtedly, the return to peace after two years has restored hope Ethiopia’s economy can regain its growth momentum. According to officials, a permanent return to peace will help unlock more than $4bn in frozen funding. The funds will ease a crippling shortage of foreign exchange that plagued the economy even before the war began.

There is a reason for optimism. The IMF is considering Ethiopia for a new funding scheme after the successful peace pact that halted the two-year war in northern Ethiopia. The IMF welcomed the peace agreement signed in Pretoria, South Africa. According to the IMF spokesperson, deliberations were underway on reforms that could pave the way for a potential fund program. If the plan materialises, the Fund’s recommitment will offer significant relief for Ethiopia’s economy. The economy has been gasping for a fiscal breathing space.

To show international cooperation and a move to stability, the Abiy administration should seek negotiations with organizations and donor parties to roll out a program for rescheduling and restructuring the state’s foreign debts to consider the current economic situation.

Moreover, the government must introduce fiscal and monetary reforms to repair the damage caused to the economy. The focus here should remain on two sides: addressing the increasing budget deficit through rationalizing military spending and re-mobilizing national resources back into prioritized sectors while also addressing anomalies in the exchange market that directly impacted inflation rates.

The hope for stability in Ethiopia is key to ensuring the Horn of Africa’s peace and security. If the Abiy administration can restore economic and political sanctity, this land, once part of the historic Abyssinia, may claim its right as Africa’s bedrock of prosperity and riches.

READ MORE: Restoring peace in Ethiopia, building Africa’s largest dam

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