Ethiopia: The Tigray conflict is expected to be long-lasting, but unlikely to lead to all-out civil war in Ethiopia

Event

The conflict between fighters from the Tigray region in the northernmost part of Ethiopia and the Federal Government has spilled over to neighbouring regions, as the Tigray region took control of some parts of the Afar and Amhara regions in the past two months. In fact, ever since Prime Minister Abiy Ahmed took office in 2018, tensions between the Tigray region and Ethiopia’s Federal Government have been rising. One such example is the purging of the Tigray people from the national army by Prime Minister Ahmed. The Tigray People’s Liberation Front (TPLF) was the leading member of the four-party coalition that ran Ethiopia for almost three decades until 2018, ruling the Tigray region until November 2020. At this time, conflict between the TPLF and the Federal Government escalated unexpectedly after the TPLF attacked a federal army camp in Tigray, and the Ethiopian army subsequently seized control in the Tigray region. In June 2021, Tigray fighters took back control of the largest part of the region. Only western Tigray – which is largely agricultural, as opposed to the rest of the region, which is more industrialized and endowed with mines – remains under the control of the Federal Government of Ethiopia. It seems that banks in the Tigray region under the control of the TPLF have been cut off from the Ethiopian banking system, while power and telecom services have also been shut down. Furthermore, the Federal Government has been blocking cargo in and out of the region despite the unfolding humanitarian crisis. To counterattack, the TPLF started to take control of parts of Afar and Amhara in July 2021 in order to put pressure on the Ethiopian Federal Government to lift the blockade. The TPLF is also calling for the ousting of Ethiopia’s Prime Minister and the withdrawal of the federal army in western Tigray. Furthermore, there has also been international pressure (from the US and the EU, amongst others) to lift the blockade on the Tigray region, failing which additional sanctions would be established on the Federal Government, while aid or direct budgetary support could also be (further) withdrawn. 

Impact

The Tigray conflict will most likely be long-lasting, as the region’s fighters are very experienced, highly motivated and see this battle as a fight for their mere existence. Moreover, the Ethiopian federal army needs to be rebuilt, given that in the past it mainly relied on the experience of the Tigray people. Consequently, political instability – and the risk of a coup to unseat Prime Minister – will remain high in the coming year, although it does not look likely that the conflict will morph into an all-out war in the multi-ethnic federation, made up of more than 80 ethno-linguistic groups.

The short-term political risk rating of Ethiopia is in category 6/7. Given the history of low level of gross foreign exchange reserves, Ethiopia has regularly reported foreign exchange shortages, which mostly arose in the past when the country faced an economic shock, but each time disappeared again when pressure eased. The Covid-19 crisis led to a drop in current account revenues, while current account payments remained relatively strong, putting pressure on foreign exchange reserves. In addition, the conflict with the Tigray region is hurting foreign exchange reserves as well as international donor support, which is waning. Therefore, foreign exchange shortages (and transfer delays) have been reported in the past year, especially for SMEs. The situation is unlikely to improve any time soon. Current account revenues are expected to only marginally improve in the coming year compared to current account payments, resulting in a forecast current account deficit of almost 4% of GDP in fiscal year June2021/July2022. Foreign direct investment inflows and official international aid, both sources of foreign exchange, could also come under strain as the conflict continues.

The medium- to long-term political risk classification falls into category 6/7 as well. The main explanation for this is the high external debt level combined with low current account receipts. Despite diversification efforts, the current account revenues are only expected to improve relatively slowly in the medium term. 
The business environment risk rating is F/G, in the light of the elevated inflation rate (about 26% in July 2021), pressure on the exchange rate (as of 15 September, the Ethiopian birr had lost about 7% of its value over the past year), poor Doing Business indicators and modest economic growth over the past year (2% in fiscal year 2020/2021).

All three risk classifications have a negative outlook given the evolving conflict in the Tigray region, as well as its potential economic implications. Furthermore, the country’s agriculture-driven economy is also vulnerable to potential droughts and locust infestations (as seen in 2020), while the ongoing Covid-19 pandemic and low vaccination rates could continue to hurt economic activity and the tourism sector. On the upside, an IMF programme and a sovereign debt restructuring successfully concluded under the G20-Paris Club Common Framework (CF) might provide liquidity; indeed, in January 2021, Ethiopia indicated that it is seeking debt treatment under the CF, though the timeline, shape and extent of the debt treatment remain unclear.

Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com