Tag: ethiopia economic collapse

Finance Minister declares peace talks are the only way to economic survival of Ethiopia

Before the start of the Ethiopian Tigray conflict the Finance Minister was a rising star in bringing in investors to Ethiopia. Now he is desperately fighting avoid complete economic collapse

In a major break from Ethiopian PM Abiy Ahmed’s stance that no negotiations will be done with the “terrorist” Tigray National State government Ethiopia’s Finance Minister Eyob Tekalign this week announced that the guns should be silenced and peace negotiations begun to return to the path of prosperity. Mr. Tekalign and Ethiopia’s economy are in the midst of disaster after having paid more than a $ 1 billion USD as well as secretive Ethiopian gold transfers via Dubai  to Eritrea and hundreds of millions in weapons sales to Turkey, Iran, among other suppliers too. 

Ethiopia’s debt to foreign creditors now exceeds $30 billion USD requiring payment of nearly $2 billion USD annually for a country whose whole normal peacetime budget is $2 billion. Prior to Abiy Ahmed taking office Ethiopia had nearly 10% growth each year for the previous ten years but now the real growth for past year and half is -2%. Many analysts estimate that Ethiopia even if immediate peace was declared would require at least 10 years of solid growth exceeding 5% per annum to climb out of catastrophic debt.

Mr. Tekalign is meeting the representative countries from the International Monetary Fund to try to arrange newer financing and payment. The likely outcome is that in return for consideration in refinancing Ethiopia will likely have to make major and significant promises which will put its economic progress forward to be under rigorous scrutiny. In other words, Ethiopia’s foray into an unnecessary and unjust war will cost it significant freedom in future economic development until debts can be paid.

The Consumer Price Index has risen more than 250% over the past year along with inflation going over 40%. The Finance Ministry is trying to gain control by lifting taxes on basic food items and making banks increase deposit reserves with central banks. International bond raters now rate Ethiopian government bonds as Caa1 which is near worthless. Displacement of millions of farmers, locusts, changing rain patterns, and a complete absence of any near term stability for Ethiopia complicate any viable economic recovery. These failing economic indicators and the progressive success of the Tigray armed forces in dominating the Ethiopian and Eritrean forces are severely dampening any interest in foreign investment.

Ethiopia must face both its military and economic failure

The Ethiopian consumer price index is more than 250% higher then before the war

A complete collapse of the Ethiopian economy comes closer to reality each passing day. The calamity this would bring in terms of literally total loss of human necessities for survival for most Ethiopians may ultimately be the cause for an end to the war. Will the Ethiopia Tigray conflict end due to peace talks, military victory, or collapse of the Ethiopian economy?

The government of Abiy Ahmed remains fixed to its position it will not negotiate with “terrorists” even though it is  suffering progressive defeats and loss of territory. The Ministry of Finance is releasing optimistic economic forecasts being sternly questioned by even economists who are ardent government supporters. At the same time international financial institutions and Ethiopian economists are sounding the alarm that the war costs are bringing the country to a financial collapse. Ethiopia has received less than $500 million in loan disbursement this year while spending $1 billion in payments to Eritrea and 51 million to Turkey. Amounts for other weapons are unknown at this time. The United States and European allies are clearly indicating tough sanctions will happen if no progress to peace is made.

Over the past several weeks the armed forces of Eritrea and Ethiopia have been retreating from advancing Tigray and Oromo Liberation Army forces. Economic activity remains stalled in Tigray as well as much of the Oromo and Amhara regions. Today the large Amhara city of Dessie is surrounded, Gondar has lost all communication, and Tigray forces are 150km away from Bahir Dar. In an attempt to slow the advance of the Tigray forces into western Ahmara the Ethiopian National Defense Force destroyed a strategic bridge at Ibnat. Military analysts at this time do not predict a speedy end or that the Tigray will be defeated. 

According to the Ethiopian Ministry of Finance the total foreign and domestic debt incurred by Ethiopia is $55.6 billion (USD). In just the last year in great part due to the war effort but also affected by COVID and poor agricultural prices the debt has nearly doubled.  Out of this more than half is debt owed to foreign lenders. Within the last year the government has paid $1.8 billion debt service payment The country’s gross domestic product was $1.4 billion but it had to pay interest on loans in excess of $1.8 billion. 

Since Abiy Ahmed assumed power the percentage of the gross domestic product used to pay interest has gone from 20% to over 33% of the GDP. Some are predicting the debt cost will go to 70% of GDP and the total debt could easily double.  Although Ethiopia is one of the top ten producers in the world of many grains abnormal rains, locusts, inflation, war, and displacement have reduced its agricultural output. Additionally food imports since Abiy took office have been increasing rather ten decreasing. Combining lessening high quality food exports with the need for more imports is leading to forecasts of greater food dependence of foreign aid.  Before the war 25% of Ethiopians were dependent on foreign food aid. In Tigray more than 90% have been assessed as needing food aid.  Now with millions displaced the number has certainly increased.

The Ethiopian government is trying to slow down inflation now at 45% for this year alone based on the Consumer Price Index by buying wheat and forcing banks to put more deposits in the central bank. Even so many Ethiopian economic experts say that even if the war stopped tomorrow it would take 10 years or more for an economic recovery assuming 5% percent or more economic growth yearly could be obtained instead of the -2% this year.

 

Ethiopia’s war machine economy is collapsing irreversibly now

The Consumer Price Index of Ethiopia has risen astronomically since the beginning of the Ethiopian Tigray conflict

There is no doubt now that Ethiopia is now in an irreversible state of economic collapse and fragmentation under Abiy Ahmed’s government. Instead of addressing the everyday problems of the people he has caused millions to be displaced, killed, starving, and put Ethiopia in severe debt spending all the countries assets on a failed military adventure.

Everyday consumer items such as diapers, enjera, petrol, vegetables, clothes, etc. have doubled or tripled in price. People are waiting hours to buy a limited amount of fuel for their cars.  Although the official government exchange rate of birr to dollar is 45 yesterday it was reported to be 67 and many forecasters predict it will approach 77 in the near future.

Although over 5 million are starving in Tigray it is now estimated that more than 1 in 4 Ethiopians are suffering food shortages. Locusts, war, changing rain patterns, displacement, lack of government funding for seeds and agricultural necessities giving way to war needs all will result in poor harvests for the foreseeable future. Abiy Ahmed has turned the whole government into a war machine neglecting the needs of noncombatants. 

War and unrest in Oromia, million displaced in Amhara, and lack of hope for peace in the near future is killing any and all export trade. European and American sanctions on Ethiopian exports coupled with escalating prices on imports cannot be sustained much longer. Roads to Kenya and Djibouti are currently blocked by war impeding export and import to only air means. Growing world wide displeasure with Ethiopian Airlines is making it hard for the airline to make enough cash to pay off the monthly loans and leases on its aircraft. There are new calls from many African countries that they have been too dependent on one airline and now wish to develop others.

Noted Ethiopian scholar Alex De Waal in July noted that there are five mechanisms apart from military strategies that would play a role in the collapse of the Ethiopian state. Ethiopia’s decades of growing economic prosperity and development came to a screeching halt in November 2020 when after months of preparation the government of Abiy Ahmed decided to proceed with a plan to crush Tigray out of existence.

At this moment the area of influence of the Ethiopia federal government has significantly contracted. De Waal predicted that the federal government would become isolated, fragmented, and dissolve. Abiy Ahmed has ceded control of Western Tigray to Eritrea who will not likely just give it back. Armed rebellion has not only broken out in Tigray but now includes Gambella, Somali-Afar border where the two ethnic groups are fighting each other, Agaw of Amhara, Beningshagul, Qemont of Amhara, and very significantly in the Oromo region. The sphere of influence and control of the central Ethiopian government has contracted significantly from its status prior to November 2020.

More and more it is appearing in the views of many analysts that the Amhara region which is not held by the Tigray is beginning to function as an independent state. Amhara leaders including the Amhara National Movement are complaining that the Ethiopian Federal government cannot be relied upon to help the Amhara people. Tigray itself is now a defacto independent country.