Previous Quarterly Editions
Expropriation Risk: 66 70 70 69 ►Political Violence Risk:60 66 66 66 ►Terrorism Risk:42 42 42 45 ►Exchange Transfer and Trade Sanction Risk: 64 64 64 63 ►Sovereign Default Risk:74 74 74 74 ►
TREND ►
Protest intensity to date* 2022 2023 Low Low Unrest risk in 2024**Cost of living: HighAnti-austerity: Medium
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
2023. This is mainly due to decreases in external funding because of World Bank and International Monetary Fund (IMF) freezes, in connection with the war in northern Ethiopia, and a significant fall in Chinese lending. Prime Minister Abiy Ahmed’s government has also imposed an unofficial moratorium on non-concessional lending.
Nevertheless, the overall debt situation remains concerning, with more than 26% of the budget for the 2023 – 2024 financial year allocated to debt repayment — more than twice the combined budget for education and health. The overall expenditure on poverty reduction, including agriculture and infrastructure, has also been declining. Moreover, the debt service-to-exports ratio (77%) and debt service-to-revenue ratio (31%) are both much higher than even the sub-Saharan African average. The 2023 – 2024 budget also shows a deficit of about 35%.
The country has been seeking debt restructuring from the IMF, which has insisted on commitment from development partners and creditor financial assurances, alongside several critical policy changes, including liberalization of the exchange rate and limits on borrowing from the national bank. The increase in the cost of imports, the rising U.S. dollar, low growth in foreign direct investment, and unreliable and even decreasing exports and remittances all add up to increase the burden of public debt.
Moreover, the worsening security situation in the Amhara and Oromia regions will likely subdue economic activity and growth and necessitate additional budget spending for defense, which may require further
borrowing. In combination, this will continue to delay and potentially derail the IMF restructuring process. Without IMF restructuring, the likelihood of default on foreign debt remains high.
The debt crisis has worsened political fragilities. The government has not delivered on reconstruction efforts in war-ravaged regions or on implementing disarmament, demobilization and rehabilitation plans. Crucially, limited funds and international supply chain constraints affected the delivery and distribution of fertilizer and seeds ahead of the farming summer season, which worsened the situation in the Amhara region and contributed to the outbreak of war there.
The government is also seeking to raise new taxes, particularly related to property in Addis Ababa, which has added to its unpopularity. The overall reduction in budget in real terms constitutes an effective austerity due to inflation (while there is a nominal budget increase for 2023 – 2024, in real terms it is much lower than previous years) and will continue to generate public anger — and potentially protests and conflict.
The economic trajectory in the past few decades, and particularly since Abiy Ahmed took over, has decidedly been toward privatization. To reduce the budget deficit and raise foreign currency reserves, the government may further open the telecom, logistics and banking sectors and privatize public enterprises.
Despite an increased budget deficit, limited public resources, and a fragile political and security context, the risks of expropriation remain low. Nevertheless, the government will seek ways to expand its tax base and collection capabilities. Moreover, as the conflict circle expands, businesses and individuals face higher chances of disruption and potentially destruction of their operations and infrastructure.
Ethiopia has increased its military operations in Somalia to support the fight against the terrorist group Al-Shabaab, which sought to penetrate south-east Ethiopia in September 2022. Ethiopian forces have since engaged Al-Shabaab within Somalian territory. With the group under significant pressure within Somalia, it has limited wherewithal to launch attacks in Ethiopia. Nevertheless, a potential worsening of simmering tensions between the Oromia and Somalia regions within Ethiopia would increase chances of an Al-Shabaab infiltration into Ethiopia.
Domestic political terrorism poses a greater risk. Serious armed conflict, notably in Amhara and Oromia — and to some extent in the Benishangul-Gumuz and Gambella regions — will continue to affect business interests and infrastructure. Armed factions across the country, including state security forces, have been implicated in human rights abuses, including attacks, killings and arbitrary detentions based on ethnic profiling. Notably, the outbreak of a protracted war in the Amhara region increases the chances of armed attacks, including in the capital Addis Ababa. Nevertheless, characterizations of political violence as terrorism remain contested.
Although the October 2022 Pretoria Peace Accord is largely holding, a new and perhaps more protracted popular and armed “Fano” revolt has emerged in the Amhara region. The entire region, other than a few of the largest cities, is out of effective government control. If not managed properly, the conflict risks breaking the ruling Prosperity Party and escalating into a larger civil and communal war that can destabilize the entire country and Horn of Africa.
Moreover, the civil war in Oromia remains active, with large parts of the region suffering from limited rule of law and security. Tensions between the Oromia and Somalia regions have also on occasion ignited armed skirmishes. With the overall gloomy economic context, the ability of the government to manage these protracted tensions and conflicts will remain constrained.
Overall, popular anger and disillusion are also growing, with affordability of basic consumer commodities increasing at astounding levels. Notably, with the outbreak of war in the Amhara region — which is one of the key grain and agricultural producers in the country — prices of food oil and other basic commodities have skyrocketed.
The National Dialogue Commission reports that it is gathering agenda items and identifying participants. Nevertheless, despite initial hopes, the dialogue process has effectively been overtaken by events. The increasing complexity of the political and armed contestations may require higher levels of engagement that the Dialogue Commission might not be apt to manage.
Accordingly, the national political and security situation will remain fragile, with high chances of worsening. These tensions, alongside broader economic and financial troubles, will hinder efforts to resettle millions of displaced people and might even generate new rounds of displacement. The overall humanitarian situation can also be expected to increase, particularly in already badly affected regions in Tigray, Amhara and parts of Oromia, adding to destabilization factors.
The Ethiopian government has eased foreign exchange controls with a view to attracting foreign direct investment and tackling the black market in currencies. Accordingly, the amount of forex that exporters maintain has been increased. Nevertheless, they will still need to surrender 50% of their foreign currency earnings.
The peace accord in northern Ethiopia helped improve relations in Western countries. Nevertheless, despite some announcements from the World Bank for loans and grants and resumption of some support from the European Union, the United States and European Union are yet to resume direct budgetary support to the government. Moreover, Ethiopia remains excluded from the duty-free access to U.S. markets under the African Growth and Opportunity Act, mainly affecting textile and apparel exports. The United States has also retained Ethiopia in the list of serious and systematic human rights violators, which will affect U.S., World Bank and IMF support.
With government commitment to transitional justice questionable and worsening conflict in Amhara, chances for continued and even new sanctions cannot be excluded. In this context, the alarmingly low levels of foreign reserves will persist, and the budget deficit will continue to increase.
Despite initial expectations for debt restructuring following the signing of the peace accord, the process has been slow, and the emergence of large-scale armed conflict in Amhara has increased uncertainties, alongside West-China geopolitical tensions.
To avoid default, the country will need to continue to allocate a high share of its export income to service external debt, which will further increase the budget deficit and constrain already suppressed public investment levels.
While continued privatization efforts and opening for external investment of the logistics, telecom and banking sectors offer hope for increased flow of foreign reserves, these are unlikely to address the massive gaps, which require a significant injection of capital that only a debt restructuring can achieve. The high levels of debt also dent chances of securing transitional loans from China, Gulf countries and other non-Western sources.
Accordingly, while a sovereign default may not occur in the short term, the closer the country gets to the maturation of 1 billion-euro Eurobond in 2024 without debt restructuring, the higher the chances of default.
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