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Can Ethiopia’s economic ‘miracle’ get back on track after the war is over?

Ethiopian Prime Minister Abiy Ahmed said this month that his government would hold talks with fighters in the northern Tigre region to end a war that has not only violated human rights and killed thousands, but also killed thousands of people in Africa. One of the most promising economies has also been derailed.

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

In the 15 years to 2019, the economy grew an average of 7 percent per capita, driven by investments in agriculture, industry and infrastructure, according to World Bank data, one of the fastest rates in the world. While it was still relatively poor, years of growth put it in a lower middle-income position, with a nominal GDP per capita of about $950 in 2020.

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

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

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

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

Now, however, the prospect of peace talks has raised hope – however temporary – that Ethiopia’s economic momentum can be restored. “We are going to slow down before we start again,” said Addis Ababa-based economist Tevodros Mekonnen. If the conflict can be resolved permanently, he said, the economy can recover.

According to officials, a permanent ceasefire could unlock more than $4bn of frozen money, and ease the severe foreign exchange shortage that plagued the economy even before the war broke out. “Without peace, there is no economy,” said Abby Sano, president of the state-owned Commercial Bank of Ethiopia, the country’s largest lender.

Nevertheless, given the intensity of the war and the impact of the coronavirus, Ethiopia fared better than many expected. Last year, the predominantly agricultural economy grew by 6.3 percent below the level of previous years, but much higher than the continental average, according to the IMF.

While some have questioned the credibility of that data, Stephen Durkon, a professor of economic policy at the University of Oxford and an expert in Ethiopia, said GDP measured the flow of income and would not immediately record the impact of destroyed assets. He said spending on war could actually boost economic activity in the short term.

Farmers harvest sorghum in a field near the village of Ayasu Gabriel | © Eduardo Soteras / AFP / Getty Images

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

Ethiopia’s Finance Minister Ahmed Shide told the Financial Times that the economy is grappling with “many challenges and setbacks, 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 liberalization of the telecommunications sector. “The economy is resilient despite many shocks,” Shide said.

Still, this year will be tough. The IMF expects economic growth to slow to just 3.8 percent as a result of the war in Ukraine and severe drought in parts of the country. Inflation is estimated to reach 35 percent due to local and global supply chain problems.

For the economy to recover, Sano said it was necessary for the government to proceed with liberalisation.

Before the war in the Tigre, Ethiopia had begun the process of selling new telecommunications licenses. Last year, it accepted a bid of $850mn from a British-backed consortium led by Kenyan operator, Safaricom. The government envisages a partial sale of state assets, including a second telecom license and stake in Ethio Telecom, the state provider, as well as parts of logistics operations such as Ethiopian Shipping Lines. “We need capital, and to have capital, we need reforms,” ​​Sano said.

Under the late Meles Xnawi, a former Tigran guerrilla fighter and national leader, until his death in 2012, the state dominated the economy. “We had impressive growth, but when you drive it obviously from the public sector, that was not sustainable,” Tevodros said. “We have to balance some of our public investments by bringing in the private sector.”

Although Ethiopia financed most of its spending through domestic savings, it also borrowed from foreign lenders, including China. Last year, Addis sought debt relief under the G20 framework to help countries hit by the COVID-19 pandemic.

The government recently hoped to create a $150 billion sovereign fund and plans to open the country’s first stock exchange next year. “We want to build progressive capitalism that will harness market power as well as the permanent role of the state,” Ahmed said.

Violence continues in many regions and the constitutional questions that sparked the war in the Tigre have not been resolved. Analysts say it will be difficult for Abiy to make lasting peace with the Tigre, which is still under a partial blockade, or to persuade the TPLF to accept market reforms, which will gradually replace the state-led model. Will move forward

“Abiy came for revenge, not reform,” said Kindeya Gebrehivot, former president of Mekele University and a senior member of the TPLF. “Development requires serious thinking, planning and bringing everyone together,” he said. “Whatever initiative he has taken is harming the national harmony.”

Abiy’s top economic adviser Mamo Mihretu said the government’s market reforms were on track. “Persistent shocks have not dampened our resolve to build an economic model that can address the challenges of legacy,” he said.

Oxford’s Durkon said it was too early to write off Ethiopia’s economy. “It is not that the economic miracle is gone, but the economic model is gone,” he said, referring to the state-led development. “Will it go back to 7-10 per cent growth? 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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