The Ethiopian Prime Minister is talking to the United States after a period of defiant silence because Ethiopia’s economic survival is threatened. Ethiopia cannot survive economically and continue the Tigray war indefinitely. Take a class in basic economics about nations and you quickly learn about “gun vs butter”. All nations need both. Now Abiy Ahmed is learning that lesson.
As reported earlier this year in the influential South China Morning Post and later by the Global reporting center in The World, China is at a crossroads about how much more it can lend to Ethiopia. The Chinese are the first to say they did not cause the Ethiopian conflict with Tigray and other groups. This conflict works against Ethiopian prosperity and debt repayment.
Abiy Ahmed has said in the past he would always prefer loans from the International Monetary Fund or World Bank which he equates to “borrowing from one’s mother” rather then the Chinese because the terms of Chinese loans are high interest rates with short repayment schedules. In addition to which there are hidden costs that Ethiopia bears by “guaranteeing” the loans against business failure.
At an estimate of Ethiopia’s debt exceeding $60 billion by the end of 2022 and no agreement yet reached with special negotiators, China and France, for the IMF it is clear that Ethiopia will need to negotiate with the West to stay afloat. In the past Ethiopia tried to “play off Europe vs China” but now the bet that China or even the Middle East alone are a way to finance Ethiopia’s economic growth appears to have been a grave misjudgment.
The conquest obsession of Abiy Abid is rapidly fading any future of economic growth and financial independence for Ethiopia. They seemed to have missed out on the first lesson in any college freshman economic class about the “guns vs butter” trade off.
This month the inflation rate for Ethiopia will reach a record 50% in one year the highest in the world. The consumer price index is expected within a short time to also reach a new high of 300 points above normal. The Central Statistical Agency which normally posts this finding has actually closed its normal reporting website.
The Ethiopian government probably has less the $400 million to run the country for the next 11 months which normally requires about $2 billion. The International Monetary Fund has decided that Ethiopia’s finances are in such disarray that it cannot issue a report on growth. Although the official government report is 6.6% growth this year most analysts are saying it will exceed -2% net loss. Fantasy will not feed the hungry nor create sustainable businesses to drive economic growth.
Prime Minister Abiy Ahmed has spent all cash reserves and transferred most gold reserves out of the country. France and China are trying to broker a new repayment plan for debt that exceeds $40 billion requiring payments of at least $2 billion year alone in debt service. Meanwhile Abiy Ahmed promises to guarantee private loan deals between private companies in Ethiopia and foreign interests have been discovered adding another $25 billion in debt previously hidden. His armies have destroyed hundreds of billions of birr worth of businesses and industries in Tigray. The war damage blight to Tigray now extends to much of Amhara with Ethiopian and Eritrean blanket destruction adding billions of birr in economic production loss and human life.
At this point the continued war and misery are no doubt going to leave what was formally the prosperous state of Ethiopia in tatters. Severe austerity measures will need to be imposed just to get any country to fund loan repayment and it is likely that natural resources will likely be the mechanism of repayment but not at any significant profit to Ethiopia. The dream of Ethiopia being a second world country that escaped poverty is gone. The previous decades of progress will be just a memory traded for the false promise of conquest and repression. Ethiopia has become another Eritrea.
With less than 2 months of funds left to run the government Ethiopia has been given a temporary reprieve from the International Monetary Fund of $408 million. The medemer reform of Prime Minister Abiy Ahmed and his Properity Party which quickly turned to oppression and challenge to conventional economic norms has failed to create the celebrated economic growth of the previous regime under the late Meles Zenawi’s Ethiopian Peoples Revolutionary Democratic Front which espoused the developmental democratic state concept.
Prior to Abiy Ahmed taking power in 2018 Ethiopia’s growth averaged over 9% from 2004 to 2019. Poverty declined from 46% in 1995 to 24% in 2016 as industry’s share of output rose from 9.4% in 2010 to 24.8% in 2019. However beginning in 2020 economic growth rapidly declined to now be less then 2%. Additionally the war prosecuted by Abiy Ahmed increased the government budget by 200%. Even if the war ends tomorrow it may take 10 years to get an economic recovery.
Although the Ethiopian economy was driven in a different direction then that recommended by Western financial analysts still the Ethiopian industrial plan under the EPRF before Abiy Ahmed saw manufacturing grew by 10% yearly during 2005-10, and by 18% during 2015-17. However once Abiy Ahmed took power, internal displacements increased throughout Ethiopia. The war prosecuted has also turned away most international investors and resulted in historical lows of the value of the birr.
Absence of clear central bank policies driven by economic rather political goals, lack of privatization, strictly regulated fuel and commodity prices, and the faulty “float system” of currency valuation are factors persisting in the financial policy under Abiy Ahmed which analysts note contribute to the progressive economic failure.