Index trend
Previous Quarterly Editions
Expropriation risk: 70 69 70 69 ► Political violence risk:66 66 66 66 ►Terrorism risk:42 45 46 48 ►Exchange transfer and trade sanction risk: 64 63 63 63 ►Sovereign default risk:74 74 74 74 ►
Overall Risk Temperature: 68 (Medium high) TREND ►
Special topic: Relationship with the 'global rules-based order'
Prime Minister Abiy Ahmed’s leadership has been characterized by maverick, unpredictable, opportunistic and transactional politics, both at home and internationally. He has shown a propensity for considering laws and established practices as inconvenient at best. Under his rule, politics has become increasingly personalized and the party system has weakened. These trends add to policy unpredictability, both at home and beyond.
The prime minister has recently shown willingness to flout long-established international and African consensus on the territorial integrity and unity of states. He has espoused a popular but alarming idea that Ethiopia has a historical right of access to the sea and became landlocked due to foreign plots. Although the desire to regain access to the sea may be legitimate, and he has emphasised that achieving this goal would need to happen through peaceful means, he has also hinted at the possibility of using force to achieve the objective.
This has created tension with neighboring countries. Eritrea seceded from Ethiopia in 1993, absorbing with it all of Ethiopia’s historical outlet to the Red Sea. It has taken Abiy’s claim seriously.
In January 2024, Ethiopia signed a memorandum of understanding with Somaliland, recognizing the breakaway region of Somalia in return for a base for Ethiopia’s nascent navy on the Indian Ocean. Ethiopia also offered shares in one of the profitable public enterprises, reportedly Ethiopian Airlines. This has escalated tensions with Somalia, whose president traveled to Eritrea and Egypt to mobilize support. Egypt is a historical rival of Ethiopia, and they are entangled in a lingering dispute over the construction of the biggest dam in Africa on the Nile River, the Grand Ethiopian Renaissance Dam.
Ethiopia also recently joined BRICS, an intergovernmental organization consisting of Brazil, Russia, India, China, South Africa, Egypt, Iran and the United Arab Emirates. One of its proclaimed objectives is to restructure the hitherto dominant global financial, economic and political system. Although Ethiopia has not been actively pursuing this goal, the government has called for reforms to the United Nations Security Council as well as the voting distribution in the International Monetary Fund (IMF).
Overall, despite initial hopes toward political (and economic) liberalization under Abiy Ahmed, the country is firmly sinking toward an unstable, personalized and authoritarian framework. In view of Abiy’s opportunistic politics, in the event of greater fragmentation of the global multilateral order, he could seek to undermine and potentially invade neighboring countries. The Somalian government has accused Abiy of wanting to annex Somaliland.
TREND ►
The risk of government expropriation of foreign assets is low. The trajectory is toward opening up the economy for foreign investment. In contrast, the government has been aggressively appropriating hundreds of thousands of domestically held buildings and land in Ethiopia’s capital Addis Ababa and surrounding areas ostensibly due to illegal structures and to make space for development projects. Abiy personally leads several of these projects.
Moreover, due to the high inflation, the government reduced printing currency, and there has been virtually no direct support from donors. This has forced the government to seek ways to expand its tax base and collection capabilities, which could increase the tax burden on businesses. The government has also often resorted to raising large “voluntary” contributions from both public (including Ethiopian Airlines and Ethio-Telecom) and private businesses to fund Abiy’s expensive projects.
Outside of the capital are reports that regional administrations are seeking similar contributions to pay civil servant salaries. While ostensibly voluntary, these contributions are backed by political pressure and may constitute a form of expropriation. Notably, they transfer significant amounts of money from the regular political process to the prime minister’s discretionary control, undermining transparency, and accountability.
The potential terrorism risk relates to the Somalia-based Islamist extremist Al-Shabaab. Following the announcement of a deal between Somaliland and Ethiopia to grant Ethiopia access to the Indian Ocean, the terrorist group has increased its rhetoric against Ethiopia for threatening the unity of Somalis. The announcement exacerbated enduring anger against Ethiopia due to the presence of the Ethiopian army in Somalia fighting Al-Shabaab, raising the risk of terrorist attacks. Al-Shabab was pushed out of several areas in Somalia in the past months but has regained some of the lost territory and remains a potent force.
Domestic political violence poses a greater risk. Ethiopian security forces and armed groups fighting the government on occasion attack business interests and infrastructure. While the violence has so far largely occurred outside of Addis Ababa, kidnappings and attacks are getting closer to the capital.
The overall political and security situation in Ethiopia is extremely fragile. The 2022 Pretoria Cessation of Hostilities Agreement between the federal government and the Tigray People’s Liberation Front (TPLF) has so far been holding, but the causes of the conflict remain unresolved, and there are signs that tensions are rising.
The entire Amhara region, the second largest in the country, has been gripped in a low-level civil war since August 2023. There is little political will to end the conflict through negotiations, but neither side appears to have the capacity to prevail. The conflict in Amhara could spread to Addis Ababa. The government in March reported that it had captured dozens of people who were plotting to orchestrate attacks in the capital and surrounding areas.
Similarly, large parts of the Oromia region, the biggest in the country, are reeling under an intractable insurgency. Insecurity and kidnappings are rife. Low-level insurgency and cross-border skirmishes also affect the Gambella region as well as the boundaries between the Afar and Somali regions of Ethiopia.
There is also a risk of interstate conflict. Relations between Abiy and his Eritrean counterpart have been deteriorating. Meanwhile, the TPLF accuses Eritrea of holding onto areas belonging to Tigray and displacing thousands. The Ethiopia-Eritrea border area will therefore remain a flashpoint.
The economy has also been struggling, with large portions of the population feeling the pains of inflation and growing inequality, while government suppression has intensified. These frustrations could raise political temperatures and hinder efforts to resettle millions of displaced people, and they may even generate new rounds of displacement.
The slow implementation of the Pretoria Peace Agreement and the involvement of government forces in severe and systemic violence in the Amhara and Oromia regions increase the chances that trade sanctions will continue. Ethiopia is already excluded from duty-free access to U.S. markets under the African Growth and Opportunity Act. Western governments have also been reluctant to restart direct budgetary support to the government, which constrains its ability to fulfill public service and investment needs. Crucially, the U.S. government in early March said that it may be unable to support Ethiopian debt restructuring negotiations in Amhara and Oromia if it detects “a pattern of gross [human rights] violations.”
Exchange transfers from Ethiopia are highly constrained, due to severe foreign currency shortages. The government has imposed a ban on using foreign currency to import a long list of commodities. These constraints are likely to remain, and companies will struggle to secure permission to transfer money out of the country, even in the event of a debt restructuring.
Ethiopia defaulted on payment of privately held foreign debt in late 2023. It avoided broader default on bilateral and multinational foreign debt after securing debt payment extensions, particularly from China. Nevertheless, the extensions are short term, and the risk of a wider default will be elevated while negotiations over the restructuring of the country’s debt remain in limbo. If violence attributed to the government is classified as “systemic,” it would further delay or even result in the withdrawal of support of the U.S. for the IMF-led restructuring.
The high levels of debt also dent the chances of securing transitional loans from the market as well as China and other non-Western sources. While the United Arab Emirates may offer a lifeline, this is unlikely to address the currency crisis and reduce the risk of default.
