Index trend
Previous Quarterly Editions
Expropriation risk: 70 70 69 68 ▼ Political violence risk:66 60 60 68 ▲Terrorism risk:46 48 51 55 ▲Exchange transfer and trade sanction risk: 63 55 55 55 ►Sovereign default risk:83 83 83 83 ►
Overall Risk Temperature: 68 (Medium high 2) TREND ▲
Special topic: Political polarization
Political and social polarization has been a major challenge in Ethiopia for decades, linked to perennial battles for state power, land, resources, historical narratives and status. This is primarily due to the ethnicization of politics. Ethnic identity is the principal basis for both political and territorial organization. The regions that make up the Ethiopian federation are principally drawn along ethnic lines, and most political parties are also organized along ethnic lines. Both traditional and social media are dominated by acrimonious ethnic voices. As a result, the political discourse is shaped by narratives of hegemony by one group (currently the Oromos), and civil wars are often presented as a battle between members of different ethnic groups — for instance, in the Amhara region, ‘Fano’ rebels effectively consider the federal army as an Oromo ethnic force.
In this context, individuals considered to be residing, doing business in and even simply passing by areas outside of their ‘home’ region are often subjected to discrimination and even attacks, massacres, displacement and undue expropriation of their property. Moreover, along adjacent areas of ethnic-based regions, clashes are common and sometimes large. In some cases, the violence has been large enough to be characterized as ethnic cleansing. On some occasions, inter-ethnic clashes have been led by trained special forces from the ethnic regions, notably between Oromia and Somali regions, and Afar and Somali regions.
While ethnic tensions have been brewing at least since the 1980s, ethnicity-based violence has skyrocketed in frequency and scale, particularly since Prime Minister Abiy Ahmed came to power in 2018. Abiy’s ascendance has been accompanied by a relative weakening of the state and proliferation of armed groups and small arms, increasing the frequency, duration and deadliness of inter-ethnic clashes.
The prominence of social media, where most Ethiopians receive and share information, has allowed the uncontrolled proliferation of violent rhetoric and propagation of ethnic animosity. For instance, Facebook is facing charges in Kenyan courts of not doing enough to prevent ethnic based violent rhetoric in Ethiopia, particularly during the 2020–2022 civil war that pitted the federal government and its allies against Tigrayan forces. In this context, ethnicity-based political polarization has expanded to infect the social and economic sphere. Ethnic-affiliated businesses, such as banks, have proliferated.
Alongside ethnicity-based polarization, there is also an increasingly religion-based polarization. Members of the historically dominant Orthodox Christian community feel a sense of victimhood, partly due to recurrent attacks on churches in Muslim dominated areas of the Oromia region and the threat of ethnicity-based factionalism within the church. Furthermore, with Abiy’s rise to power, Muslims and Protestant Christians (Abiy is himself a protestant Christian) have become increasingly assertive, including claiming public and media spaces that were historically used by Orthodox Christians. Inter-religious polarization has also on many occasions led to violence, killings and displacement, although at a much smaller scale than inter-ethnic violence. In some areas, religious and ethnic polarization are cross-cutting.
While identity-based violence has increasingly become widespread, the level of polarization is perhaps higher among ethnic elites. Polarization is likely to remain very high, and even to intensify, preventing the conduct of civic deliberations and the emergence of broad-based political settlement. Indeed, the work of the National Dialogue Commission, established in 2022 ostensibly to narrow polarization and enable the emergence of a new political settlement, has led to maximalist demands that may undermine any hopes for stability, democracy, and sustainable and inclusive development.
Identity-based polarization is linked to historical narratives of oppression and victimhood, as well as the absence of inclusive and democratic politics. Because of winner-takes-all outcomes and an authoritarian political culture, whoever controls central power tends to propagate their preferred historical narratives and appoint co-ethnics to key political, security and public media positions, feeding a cyclical sense of hegemony, exclusion and polarization.
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The risk of expropriation remains low. However, government officials have sought ostensibly ‘voluntary’ contributions from businesses for various initiatives, mainly led by Prime Minister Abiy Ahmed. This may continue and arguably constitutes a form of informal taxation or expropriation. Moreover, officials often impose arbitrary fees on cargos moving in and out of Addis Ababa through the Oromia region.
The government is also engaged in ‘corridor development’ initiatives in Addis Ababa and increasingly other major cities across the country, which involve expansion of public roads leading to demolition of houses and business buildings, often on short notice and without adequate compensation. Foreign businesses may not be directly affected, but this can cause operational disruptions.
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Ethiopia continues to face recurrent challenges of political violence. Civil war continues in the Amhara and Oromia regions, the two largest regions, disrupting the free movement of people, health services and education (more than 7 million children are out of school in Amhara alone).
Internal struggles among Tigrayan political and security leaders also threaten the delicate agreement that ended the 2020–2022 civil war between the federal government and the Tigray People's Liberation Front (TPLF). On April 8, Abiy appointed Tadesse Worede as president of the Tigray Interim Regional Administration. This fills an immediate leadership vacuum, but factionalism within the TPLF, tensions with Addis Ababa and Eritrea, and the presence of multiple armed groups create a continued risk of violence in Tigray.
Meanwhile, the Ogaden National Liberation Front has announced the collapse of a peace accord it had signed with the Ethiopian government, signaling the possibility of reverting to violence in the Somali region. As a result, these and many other parts of the country are under effective military command. These conflicts are unlikely to be brought under control in the short term and may even intensify.
These internal troubles have been complicated by escalating tensions between the Ethiopian and Eritrean governments. Following Ethiopia’s pursuit of access to the sea as a matter of ‘existential’ need, Eritrea is concerned that Ethiopia may seek to annex Eritrean coastal areas forcefully, notably Asseb port, which Ethiopia lost when Eritrea seceded in 1993. Moreover, the two countries have boundary disputes, and each reportedly supports rebel forces against the other. This external tension may be particularly entangled with the problems in the Tigray and Amhara regions of Ethiopia, particularly as the Eritrean government seeks to align itself with anti-government forces in the two regions.
Ethiopia faces a low risk of terrorism. However, rising regional tensions could change that.
Up to now, Ethiopia and Somalia have cooperated against the jihadist group Al Shabaab, which mainly operates in Somalia. However, Somalia is unhappy with Ethiopia’s potential recognition of the breakaway region of Somaliland in return for a naval base and could become less willing to contain Al Shabaab, giving the group more freedom to carry out attacks in Ethiopia.
Additionally, the ethnic nationalist Ogaden National Liberation Front appears to be returning to armed struggle in Ethiopia’s Somali region, and Al Shabaab could exploit the instability that results.
In addition, rebel forces in the Oromia region are often engaged in large scale kidnappings, and rebel forces in Amhara also stage small scale attacks, primarily against security organs, which may cause disruptions, including possibly in the capital Addis Ababa.
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Since mid-2024, the Ethiopian government has formally liberalized the foreign exchange market and ostensibly implemented an interest-rate-based monetary policy framework, in line with bailout agreements with the International Monetary Fund (IMF) and the World Bank. The government has also eased limits on exporters to deposit their foreign exchange earnings at the National Bank of Ethiopia. In theory, these measures should make exchange transfer less constrained.
Nevertheless, despite the transfer of billions of dollars from the IMF and the World Bank, access to foreign exchange remains constrained. Liquidity in banks, including for foreign currency, is a recurrent challenge.
Ethiopia has been suspended from the African Growth and Opportunity Act (AGOA) since January 2022. With the Trump administration’s focus on trade deficits and tariffs, it is not clear if the suspension will be lifted.
The risk of new trade sanctions is low. Nevertheless, a return to war in Tigray, worsening violence in Amhara or escalation of the confrontation with Eritrea could potentially lead to sanctions.
In December 2023, Ethiopia defaulted on a $1 billion Eurobond after missing a $33 million coupon payment. Restructuring negotiations are ongoing. Despite securing a $3.4 billion financing program from the IMF in July 2024, there have been no significant breakthroughs with private creditors, who have expressed skepticism regarding Ethiopia's repayment capacity and have resisted proposed debt reductions (i.e., ‘haircuts’). Ethiopia has relied mainly on concessional loans, minimizing exposure to non-concessional private debt, but the default could still affect its ability to borrow. Prolonged resolution of the default may deter foreign direct investment and heighten the risk of further defaults on other obligations.