After the war ends, can Ethiopia’s economic ‘miracle’ get back on track?

Ethiopia’s prime minister Abiy Ahmed said this month that his government would negotiate with fighters in the northern Tigray region to end a war that has not only unleashed human rights abuses and killed thousands of people but has also derailed one of Africa’s most promising economies.

Until civil war broke out in November 2020, Ethiopia – Africa’s second-most populous country with 114mn people – had been regarded by development economists as a success story, albeit one engineered by an authoritarian government.

In the 15 years to 2019, driven by investment in agriculture, industry and infrastructure, the economy grew on average 7 per cent annually per capita, according to World Bank data, one of the fastest rates in the world. Although it was still relatively poor, with a nominal per capita gross domestic product of roughly $ 950 in 2020, years of growth had put it on the cusp of lower middle-income status.

“There’s no doubt that Ethiopia made tremendous gains through the development-state approach,” said Kingsley Amoako, former executive-secretary of the UN Economic Commission for Africa, referring to the country’s Asian-inspired state-led model.

Ethiopia’s unfinished economic miracle appeared all but dead as war caused what officials estimated to be “billions of dollars” in lost growth and destroyed roads, factories and airports. The conflict also shattered a fragile political truce through which, for nearly 30 years under the tight control of a coalition led by the Tigray People’s Liberation Front, the country’s main ethnic groups sought to set aside their differences in the interests of national development.

A fighter loyal to the Tigray People's Liberation Front
A fighter loyal to the Tigray People’s Liberation Front © Ben Curtis / AP

The economy received a further jolt when, after war broke out in 2020, foreign donors withdrew billions of dollars in financial support. Last year, Washington tightened sanctions further, ending Ethiopia’s tariff-free access to the US market and threatening thousands of jobs in a burgeoning textile industry.

Now, though, the prospect of peace talks has raised hopes – however tentative – that Ethiopia’s economic momentum can be restored. “We’re just going to slow down, before we start coming up again,” said Tewodros Mekonnen, an Addis Ababa-based economist. If the conflict could be permanently resolved, he said, the economy could recover.

A permanent ceasefire could unlock more than $ 4bn in frozen funding, according to officials, and ease a crippling shortage of foreign exchange that plagued the economy even before the war began. “Without peace, there is no economy,” 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 coronavirus, Ethiopia performed better than many expected. Last year, the mainly agricultural economy grew 6.3 per cent, according to the IMF, below the level of previous years but much higher than the continental average.

Although some have questioned the reliability of that data, Stefan Dercon, a professor of economic policy at Oxford university and an expert on Ethiopia, said that GDP measured the flow of income and would not immediately register the impact of destroyed assets. Spending on the war itself could actually boost economic activity in the short term, he added.

Farmers harvest crops of sorghum in a field near the village of Ayasu Gebriel, near Alamata, Ethiopia, on December 10 2020
Farmers harvest crops of sorghum in a field near the village of Ayasu Gebriel © Eduardo Soteras / AFP / Getty Images

“Despite appearances, the conflict remained relatively localized,” Dercon said. “So big parts of the country were as stable or unstable as they were in previous decades when you had fast growth.”

Ahmed Shide, Ethiopia’s finance minister, told the Financial Times that the economy was grappling 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, Africa’s largest carrier, and the liberalization of the telecoms sector. “The economy is resilient despite multiple shocks,” said Shide.

Even so, this year will be harder. The IMF expects economic growth to slow to just 3.8 per cent, partly as a result of the war in Ukraine and a severe drought in parts of the country. Inflation is forecast to hit 35 per cent, stoked by local and global supply chain problems.

For the economy to recover, Sano said it was essential for the government to press ahead with liberalization.

Before the war in Tigray, Ethiopia had started the process of selling off new telecom licenses. Last year, it accepted an $ 850mn bid from a British-backed consortium led by Safaricom, a Kenyan operator. The government envisages a partial sell-off of state assets, including a second telecoms license and a stake in Ethio Telecom, the state provider, as well as parts of logistics operations such as Ethiopian Shipping Lines. “We need capital and in order 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 when you dissect it was very clearly public-sector driven, which was not sustainable,” said Tewodros. “We have to balance some of our public investments by bringing in the private sector.”

Although Ethiopia funded much of its spending through domestic savings, it also borrowed from foreign lenders, including China. Last year, Addis sought debt relief under a G20 framework to help countries battered by the Covid-19 pandemic.

The government recently launched what it hopes to be a $ 150bn sovereign fund and is planning to open the country’s first stock market next year. “We want to build progressive capitalism that will harness the power of the market, as well as the sustainable role of the state,” Ahmed said.

Violence in several regions continues and the constitutional questions that stoked the war in Tigray have not been resolved. It will be hard, analysts say, for Abiy to forge lasting peace with Tigray, which is still under partial blockade, or to persuade the TPLF to accept market reforms that will slowly unpick the state-led model it pioneered.

“Abiy came for revenge not for reform,” said Kindeya Gebrehiwot, a former president of Mekelle University and a senior member of the TPLF. “Development needs serious thought, planning and bringing everyone on board,” he said. “All the initiatives he has taken are damaging 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 resolve to build an economic model that can resolve 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 is gone, but the economic model is gone,” he said, referring to state-led development. “Will it go back to growth of 7-10 per cent? I don’t know, ”he said. “But to give up and say it won’t grow at all, I don’t think so.”

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