Covid-19 | Apr 17,2020
Nov 11 , 2023.
In November last year, a ray of hope pierced the gloomy skies of Ethiopia as the Pretoria Accord was inked, signalling an end to a devastating two-year civil war that had torn through the northern reaches. The anniversary last week should reckon a dispassionate reflection of the war’s enduring impacts and Ethiopia’s fraught path to recovery.
The war, originating in the Tigray Regional State, tragically spiralled into a broader conflagration, ensnaring adjacent regional states and drawing in Eritrea. It was brutal and needless, extracting a grim toll on human lives and suffering, leaving millions displaced and mourning.
The Pretoria Accord, notable for its lack of clear victors or the vanquished, brought an uneasy calm, but the scars it left on Ethiopians’ socio-political fabric are immeasurable.
The aftermath of the war presents a harrowing landscape. Displaced populations linger in makeshift shelters, enduring the loss of homes and livelihoods. Tens of thousands of soldiers and combatants bear the physical and psychological scars of war, while countless parents mourn lost children, spouses grieving partners, and children orphaned.
The human tragedy is mirrored in the economic sphere, leaving Ethiopia in a precarious state. Security and economic opportunity have become scarce commodities.
The conflict severely battered the national economy, leaving over 20 million people food insecure. Macroeconomic imbalances are rife, and the cost of living continues to soar. Fiscal deficits are growing, and policy responses have done little to curb rampant inflation.
The national treasury faces dwindling foreign exchange reserves, adversely impacting Ethiopia’s standing with international credit agencies. This financial fragility was highlighted by Fitch Ratings’ recent downgrade of Ethiopia’s long-term foreign-currency issuer default rating to ‘CC’ from ‘CCC-’.
Fitch’s downgrade reflects concerns over Ethiopia’s declining external liquidity and significant external financing gaps, increasing the fear that default could be on the horizon. This is compounded by Ethiopia’s participation in the G20 Common Framework (CF) debt relief initiative, which demands comparable treatment for official and private creditors.
The strained external liquidity is evident in the looming sovereign external principal and interest payments, estimated to exceed two billion dollars ending July 7, 2024, and approximating four billion dollars in 2025. The declining forex reserves, now at less than one month of import payments, exacerbate this situation.
Ethiopia’s structural current account deficits and external imbalances have shown little improvement over the past three years, further strained by multiple shocks (pandemic to drought and locust invasion to wars) and disrupted external loans. Despite slightly narrowing the current account deficit this year, the country continues to face powerful economic headwinds.
The federal government’s increasing reliance on domestic financing, primarily sourced from the central bank and private banks’ investment in bonds and treasury bills, reflects a shift in funding strategies due to diminished external official funding.
The National Bank of Ethiopia’s directives, such as requiring commercial banks to purchase new five-year Treasury Bonds at a nine per cent interest rate, should serve as an indication of a move to expand domestic financing avenues.
The federal government’s fiscal position remains tight, with the general budget deficit estimated to have narrowed this fiscal year. Low revenue collection capacity, fueled by foreign exchange market distortions, most likely contributed to these crises.
Central bank data reveals a significant increase in direct lending to the federal government during the conflict, a trend that continued even after the November peace deal. The high growth of broad money indicates a reliance on monetary expansion as a financial strategy.
The economic ramifications of the conflict are profound, with the Minister of Finance, Ahmed Shide, estimating a reconstruction cost of up to 20 billion dollars, five times the export earnings.
Inflation remains a pressing concern, with high headline inflation rates reflecting supply-side shocks, currency weakness, and expansionary fiscal and monetary policies. Policymakers’ efforts to combat inflation include capping bank credit growth and reducing central bank advances, albeit with little success in changing the tide.
Ethiopia’s debt profile remains vulnerable, with more than half of government debt held by external creditors. Over 90pc of this is owed to multilateral and bilateral lenders, limiting risks to the debt profile but still leaving it susceptible to sharp exchange rate depreciations.
The Fitch downgrade last week, coinciding with the Pretoria Accord’s anniversary, could show the intertwined nature of Ethiopia’s financial and economic evolution with its conflict-ridden past.
The presence of Eritrean forces in Tigray, the unresolved contestations over areas in western Tigray, and the significant displacement of people remain contentious issues. The federal government’s approach to ongoing conflicts, particularly in the Amhara Regional State, raises concerns about repeating past tactics and rhetoric.
The economic implications of these conflicts are far-reaching, affecting commodity prices, agricultural cycles, and human rights conditions. The already strained economy cannot sustain further militarised conflicts, whether internal or with external forces.
The ongoing conflicts in the Amhara and Oromia regional states pose further challenges to Ethiopia’s relationship with international creditors, who closely scrutinise its political economy before agreeing to debt restructuring terms. An elusive deal with the International Monetary Fund (IMF) remains a critical yet unachieved goal for the administration of Prime Minister Abiy Ahmed (PhD). They demand it to demonstrate a commitment to peace through the implementation of the Pretoria Accord and transparent communication of the difficulties encountered.
However, the unresolved issues and unfulfilled promises of the Accord continue to resonate across the country, casting a long shadow over the prospect of enduring peace and stability. The two statements issued by Addis Abeba and Meqelle last week, showing mutual recriminations, reveal the road away from war has not been travelled further.
While a significant milestone in halting active hostilities, the Pretoria Accord has not translated into comprehensive political solutions to Ethiopia’s deep-seated cleavages that are wars of visions. The resumption of conflicts should serve as a stark reminder of the fragility of the peace thought to have been within grasp. The temporary respite experienced by the people in Tigray should remind the devastating impact of war on society and the dire need for enduring solutions.
The failure to engage in genuine, purpose-driven negotiations for broader political settlements reveals a critical gap in the path to reconciliation and reconstruction. The federal government’s approach, particularly in its handling of the conflicts in the Amhara and Oromia regions, appears to mirror past strategies that have proven ineffective in addressing the root causes of unrest.
The international community’s role in supporting Ethiopians through these turbulent times remains equally critical, as they strive to overcome the legacy of conflict and chart a path toward a more stable future.
PUBLISHED ON Nov 11,2023 [ VOL 24 , NO 1228]
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