Covid, conflict and debt hinder Ethiopia's economic reforms

Nairobi

Shortly after taking office, Ethiopia's Prime Minister Abiy Ahmed promised a spectacular overhaul of the tightly-controlled economy: reforms to spur growth, unshackle the country's potential, and lift millions out of poverty.

But three years on, with elections on June 21, Abiy's agenda remains largely unrealised, and the country burdened with debt, the economic pain of the coronavirus, and a costly war in Tigray.

"Things are worse now... The country is broke and on the verge of defaulting," said one European diplomat, who asked not to be named.

One of Africa's fastest-growing economies, Ethiopia took massive loans to fund some of its flashiest infrastructure projects, including a modern railway from Addis Ababa to Djibouti.

External debt

But paying back its external debt -- some $30 billion (25 billion euros), mostly to China -- has proven difficult.

This year alone, Ethiopia owes about $2 billion to its creditors and has sought unsuccessfully to defer payment.

"We are not now in a position to pay," said Alemayehu Geda, a professor of economics at Addis Ababa University.

Ratings agency Moody's in May downgraded Ethiopia's credit score, following a similar cut by Fitch Ratings in February.

Alemayehu said the problem is not the amount of borrowing -- Ethiopia's external debt to GDP ratio has fallen under Abiy -- but a dire lack of dollars.

The country of 110 million people imports far more than it exports, fuelling a structural deficit of much-needed foreign exchange.

'A cancer'

This currency crisis also hurts businesses, which are often forced to wait months to secure the dollars they need to run their ventures.

A nationwide shortage of cement, for example, is because manufacturers cannot import the spare parts needed to run their factories, not due to a lack of raw materials, said Ashenafi Endale, editor of the Ethiopian Business Review magazine.

Inflation meanwhile -- described recently by Abiy as "the cancer of the economy" -- remains high at over 13 percent, and food costs are soaring.

Compounding the pain, Alemayehu estimated some three to four million Ethiopians have been driven into poverty by the Covid-19 pandemic.

The International Monetary Fund (IMF) said economic expansion slowed in Ethiopia from nine percent in 2019, to two percent in 2021.

However agriculture -- the backbone of Ethiopia's economy, contributing one-third of GDP -- resisted the downturn, and the IMF forecasts that growth will rebound to eight percent in 2022.

Costly war

Abiy has acknowledged the unexpected cost of the pandemic to his reforms.

"When we designed the reform agenda... there was no Covid-19," he told parliament in March.

But he also blamed other factors -- a record locust invasion, serious floods "and above all, the occurrence of widespread conflict has forced us to waste a large amount of effort, time and resources".

In November 2020, Abiy ordered troops into Tigray after accusing the region's former ruling party of orchestrating attacks on federal army camps.

He vowed a swift operation to bring the dissident regime to heel -- but seven months later, the war drags on at untold cost to lives -- and state coffers.

"The war itself it is very expensive," said Alemayehu.

"We don't know the actual figure. When you are firing a bullet you are literally firing a dollar... I am sure it will be huge, no doubt about it, and it will put pressure on the government."

The human toll of the war has also been devastating, with the UN reporting 5.2 million people in Tigray need urgent food assistance and an emerging famine threatening some 350,000 people.

Different mentality

Nevertheless, Ethiopia's economy has begun opening under Abiy.

Less than 10 percent of the various economic sectors were open to foreign investment when Abiy was appointed prime minister in 2018, said Olivier Poujade, founder of East Africa Gate, a consulting firm.

"Now, the opposite is true," he said, praising a "very different mentality" under the new administration.

Some of the higher-profile commitments -- such as the partial privatisation of state-owned behemoth Ethiopian Airlines, the largest carrier in Africa -- are still pending.

But in June, the government started the process to partially privatise Ethio Telecom, and earlier awarded a telecom licence to a consortium led by Kenya's Safaricom, marking the historic end of a state monopoly over the key sector.

There are signs foreign investors remain upbeat.

Soufflet, a French company, just opened a factory in an industrial park outside Addis Ababa to produce malt for beer -- its first in Africa. But the venture was not without hiccups.

"The major challenge for us is to manage the gap that might exist between rhetoric and reality," said Soufflet's general manager Christophe Passelande.

Ethiopia "has enormous potential: more than 110 million people, growing purchasing power, despite everything... When you're in the consumer business, these are very important development prospects."