Ethiopia: With peace talks approaching, will the economy bounce back?

By Fred Harter
Posted on Tuesday, 9 August 2022 12:34

A view shows groceries at the Mercato open-air marketplace in Ketema, district of Addis Ababa, Ethiopia July 21, 2022. REUTERS/Tiksa Negeri

Once hailed as the economic miracle of Africa, Ethiopia is reeling from the pandemic and more so from the Tigray civil war. The cost of rebuilding health centres, government offices and other infrastructure is likely to be billions of dollars, but will the prospect of peace help steer the economy back on track?

Two years ago, Thomas Endrias used to find regular employment as a day labourer at construction sites in Addis Ababa, but lately, he struggles to find shifts. “There’s little work now,” he tells The Africa Report. “I am just sitting around.”

Ethiopia has been one of the world’s fastest economies over the last 15 years, recording average annual growth of 9.5%, according to the World Bank. Much of it was fuelled by huge spending on infrastructure and agribusiness as the country attempted to replicate the ‘economic miracle’ of East Asia through centralised planning.

After he became prime minister in 2018, Abiy Ahmed shifted away from this state-led model, which relied heavily on commercial borrowing and Chinese loans. His economic reform agenda sought to liberalise the economy by opening up government-controlled sectors to foreign investment.

However, economic shocks of Covid-19 and the Tigray civil war – which broke out in November 2020 – have threatened his reform plan. Ethiopia has also been hit by the global downturn sparked by Russia’s invasion of Ukraine and a severe regional drought that has wiped out 2.5 million livestock and threatens 25 million more in the south and the east of the country.

Last year, the IMF did not make a GDP growth forecast for Ethiopia owing to ­”unusually high degree of uncertainty” amid the Tigray war.

In April, the Fund predicted growth of 3.8% in 2022. “This is a huge decline,” says Patrick Heinisch, an economist at Helaba Bank in Germany. Drought and conflict have left 29 million Ethiopians in need of aid.

Hit hard by war

The country is also facing severe foreign currency shortage, brought on – in part – by increased defence expenditure, as well as high inflation, which is at 33.5%. In December, the data from the finance ministry showed that the total amounted to $2.4bn, enough to cover two months of imports.

The cost of rebuilding health centres, government offices and other infrastructure devastated by the war is likely to be billions of dollars.

Some sectors have seen huge price hikes.

  • The cost of contracting trucks to import goods from Djibouti’s port has doubled, the result of fuel price increases, vehicle shortages resulting from the war, and competition from humanitarian agencies that are leasing large fleets to deliver aid, according to sources working in logistics.
  • The price of cement has increased threefold, bringing a temporary halt to the construction boom that has transformed Addis Ababa’s skyline over the last decade.

The US and the EU, meanwhile, have cut off budgetary support out of concern for human rights abuses. Last year, Moody’s cut Ethiopia’s credit rating twice, citing delays in planned debt restructuring. Plans have been postponed to sell stakes in Ethio Telecom, the state telecoms giant, and the national air carrier, Ethiopian Airlines.

Several businessmen in Addis Ababa told The Africa Report that their companies are struggling to pay service providers in foreign currency.

“We have been absolutely impacted by the war in terms of resources, reduced business, forex loss and the lack of imports coming in,” says one person.

Bullish or blinded by hope?

However, the government remains bullish about Ethiopia’s economic prospects. In comments broadcast on Wednesday, Abiy said macroeconomic indicators were “encouraging”, citing earnings of “more than $10.3bn” from exports of goods and services. “Given the situation we are in, this is a huge achievement,” he said.

Some investors and analysts are also tipping Ethiopia’s economy to bounce back. Heinisch from Helaba Bank points out there has still been “significant” foreign investment despite the Tigray conflict, “averaging at $800m a quarter” last year, as “companies still see the potential of the growing market” in Ethiopia.

Much of this foreign investment stems from Safaricom’s entry into Ethiopia. The Kenyan telecoms company has invested $1.2bn since winning Ethiopia’s first ever private telecoms licence in May 2021. Plans to sell a second licence did not go ahead after it failed to attract bids.

“It’s likely we will continue to see foreign direct investment inflows, and these will increase if the government gets its major flagship projects back on track,” says Heinisch.

Talks = investor optimism

After nearly two years of conflict, both the federal government and the rebel group Tigray People’s Liberation Front (TPLF) recently said they are willing to resolve their differences through talks, spurring optimism among investors.

Mehrteab Leul, the managing director of MLA, a law firm in Addis Ababa that advises several big foreign investors, says international companies previously put off by the uncertainty caused by the Tigray war are once again exploring opportunities to invest in Ethiopia.

“Now the conflict has subsided and peace negotiations are underway, business has started to pick up again,” says Mehrteab. “The interest we are getting from new companies considering Ethiopia as an investment has grown in the last couple of months.”

Mehrteab points to a number of factors that he says helped Ethiopia retain its appeal as a destination for investment. Chief among these is the country’s young population of 110 million and the construction of the Grand Ethiopian Renaissance Dam (GERD) on the Blue Nile. The project is expected to generate 6,000 megawatts of hydropower once it is completed

Mehrteab also underlines the impact of reforms already introduced by Abiy’s government, including revisions to Ethiopia’s investment law that have opened up several sectors, including healthcare and education to foreign investors, as well as Ethiopia’s ratification of the 1958 New York convention on arbitration. “These reforms brought a huge change to the Ethiopian investment landscape,” he says.

Scepticism persists…

Still, others are sceptical, pointing out that several deep-rooted issues remain, such as the burgeoning black market, Ethiopia’s negative trade balance and the difficulties companies face in repatriating profits, which can put investors off.

New rules mean exporters can only keep 20% of their foreign currency earnings, with the rest exchanged with the national bank on a compulsory basis, and the patchy enforcement of regulations creates an unpredictable environment for investors.

 “There is no logic to the market here,” says a foreign consultant, who adds that “GDP growth has been mostly the result of government investment. It has never really trickled down into the rest of the economy.”

I am just trying to survive… but if people do not buy from me, I fear I will not get the money I need.

The foreign currency crunch could soon be eased by funds from international donors. The World Bank has committed $300m to help with post-war rebuilding efforts, and the EU is planning $1bn in development assistance over the next five years, although these funds will not be dispersed directly to the government.

Predictions of growth

Meanwhile, Ethiopian Airlines, a key foreign earner, has seen business pick up following the worldwide easing of Covid-19 travel restrictions, injecting much-needed cash into the economy.

In June, an IMF team visited Addis Ababa. Heinsch believes the body could have a programme in place for Ethiopia next year, “depending on financing commitments from donors and debt restructuring”.

If you were to sit down on Wall Street and run the numbers, you would have thought Ethiopia’s economy would have totally collapsed, but it did just the reverse, it actually grew.

The IMF predicts Ethiopia’s GDP will grow by 5.7% in 2023, still down on previous years, but still better than other large African economies, including Nigeria, South Africa and Kenya.

Zemedeneh Negatu, the chairman of Washington-based investment firm Fairfax Africa Fund, says this figure is an indicator of the Ethiopian economy’s “resilience” in the face of “external and internal challenges.”

“If you were to sit down on Wall Street and run the numbers, you would have thought Ethiopia’s economy would have totally collapsed, but it did just the reverse, it actually grew,” he says. “All the Ethiopian businesses we have invested in, except one, grew fairly well.”

Zemedeneh predicts Ethiopia’s economy will fully recover “in the next year or 18 months because the long-term fundamentals are still strong and also due to the economic reforms currently being implemented.”

The reality on the street

For now, though, many Ethiopians are struggling to make ends meet as the crisis of the cost of living bites deeper. Etenant Siyoum, a roadside coffee seller in Addis Ababa, says she has had to reduce the amount of cooking oil she uses due to price increases. “It has become normal to see expensive prices,” says Etenat. “I struggle to buy even basic things like food and shoes.”

Her account is echoed by Nejat Endris, a vegetable stall holder, who says she has had fewer customers since she was forced to increase her prices earlier this year. “I am just trying to survive,” she says. “But if people do not buy from me, I fear I will not get the money I need.”

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