Previous Quarterly Editions
Expropriation Risk: 65 69 69 65 ▼ Political Violence Risk: 60 60 60 59 ▼ Terrorism Risk: 50 45 45 42 ▼ Exchange Transfer and Trade Sanction Risk: 64 64 64 64 ► Sovereign Default Risk: 75 75 75 75 ►
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
Although it is responsible for less than 0.1% of global emissions, Ethiopia has nominally shown a strong commitment to climate change mitigation policy. A new Nationally Determined Contribution (NDC) under the Paris climate accord commits the country to reducing emissions by 69% by 2030, putting Ethiopia in line with global targets to limit temperature increases to 1.5 degrees Celsius.
Moreover, the NDC is aligned with a Climate Resilience and Green Economy Strategy, which in turn forms one of the pillars of the country’s national development plan. Meanwhile, Prime Minister Abiy Ahmed has demonstrated a personal commitment to the issue, notably launching a Green Legacy initiative to plant several billion new seedlings every year to combat deforestation and related environmental degradation.
However, the impact of climate change on the country is far more prominent as an issue than attempts to mitigate climate change. Ethiopia is one of the most drought-prone countries in the world and climate change already appears to be exacerbating this. Since the 1980s, the average annual temperature in Ethiopia has already increased by over 1 degree, with most of this change happening since the late 1990s. Over this period, Ethiopia has endured ten major droughts, with the frequency of these rising dramatically over the past decade. Indeed, since late 2020, parts of the country have endured three consecutive below-average rainy seasons, leaving many rural communities on the brink.
This is particularly troubling given that 85% of Ethiopians live in rural areas and most rely on subsistence farming to survive. Moreover, most of Ethiopia’s current emissions, some 85%, are related to agriculture, forestry and livestock. This means growing climate-induced pressures on rural communities and the possibility food supply could begin to run up against emissions reductions plans.
A relative lull in the conflict in northern Ethiopia since early 2022 has raised hopes the economic climate may improve. Certainly, the government hopes to capitalise on the improved outlook. Having twice delayed a second auction of telecoms spectrum, the government is expected to restart this project soon, alongside other plans in sectors such as transport and sugar.
Moreover, in February, the prime minister announced plans to open Ethiopia’s banking sector, one of the last closed markets in Africa, to foreign competition. With high market concentration and good profitability, this is likely to attract significant interest, even if precise details of how the liberalisation will be handled are not yet available.
All this fits into the government’s long-standing efforts to reform the struggling state-led development model that Ethiopia has operated under for decades and to forge a new private-sector-led, liberal economy. However, growing fiscal pressures mean the government is also under increasing pressure to move forward with this quickly.
On the one hand, this is likely to translate into greater efforts to accommodate investors. On the other, it may mean a less than meticulously planned reform process. Moreover, although the government aims to provide a hospitable climate for foreign investment, there are still significant risks to investors, not least the risk the conflict in northern Ethiopia, which has paused rather than ended, may yet resume.
Risks of political violence remain extremely high. Although the conflict in northern Ethiopia has seen a relative calm since end-2021, the disengagement between federal and Tigrayan forces has been tacit rather than formal, and has not stopped fighting altogether, amid continued clashes between Tigrayan and Afar regional forces in particular.
On March 24, the federal government announced a unilateral ‘humanitarian truce’, which Tigrayan forces promptly agreed to reciprocate, in what has become the first concrete step towards a peace process since the conflict began. However, the step is a very small one that commits the parties only to a de facto truce they are already observing, and the delivery of humanitarian aid, which they had already promised.
Meanwhile, there are significant risks to the truce (much less the prospect of it evolving into a peace process), not least due to divisions within the ruling Prosperity Party over how to approach a peace process, and deep-seated grievances among Amhara, Afar and Eritrean forces, which could disrupt aid flows and complicate negotiations. There is also rising pressure on Tigrayan authorities to alleviate the humanitarian situation before they face a mass starvation event.
In this context, the truce looks extremely fragile, and a return to conflict is a serious risk should it collapse. Even in the best-case scenario, in which the truce holds, aid begins to flow, and a modicum of confidence is built, a formal peace process will face enormous challenges amid incompatible redlines and a zero-sum approach by key actors.
Moreover, although the Tigray situation is by far the most serious, conflicts elsewhere in the country, most notably in western Oromia and Benishangul-Gumuz, remain unresolved and domestic political tensions are extremely high. A promised national dialogue nominally aims to address these issues but has so far been a source of political divisions rather than political reconciliation due to the government’s lack of engagement with opposition forces over the preparations and format. It is still possible the government could alleviate these shortcomings, but there have been no concrete steps in this direction yet.
Jihadist terrorism still represents only a very minor risk in Ethiopia. Domestic political terrorism is a greater, although still minor, risk. Armed militias in Oromia and Benishangul-Gumuz periodically attack business interests or infrastructure. Armed factions across the country, including state security forces, have been implicated in serious human rights abuses, including attacks, killings and arbitrary detentions based upon ethnic profiling, which in turn can spark reprisals. However, despite the brutality of some of the violence, it would be difficult unequivocally to characterise this as terrorism.
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The humanitarian truce could significantly ease sanctions risks, and indeed comes as the U.S. Congress was poised to consider a bill recommending new sanctions against Ethiopia. If the truce should hold and especially if it should develop into a formal peace process, neither of which are by any means guaranteed, the risk of new sanctions should recede. However, momentum towards sanctions could quickly snap back if the truce collapses and fighting resumes.
Indeed, the White House in September announced a sanctions framework that could be levelled against individuals or entities deemed responsible for human rights violations, obstructing aid deliveries or undermining peace efforts in Ethiopia, albeit without actually designating any individuals, in what was seen as an effort to concretise the sanctions threat. In November, several Eritrean individuals and entities were sanctioned for involvement in the war. Although no Ethiopians have yet been sanctioned, the framework now exists for this to happen rapidly.
Meanwhile, in late 2021, U.S. officials announced Ethiopia would no longer be eligible for duty-free access to U.S. markets under the African Growth and Opportunity Act (AGOA) in 2022, due to its failure to meet minimum human rights standards. Ethiopian exports to the U.S. (mainly textiles and apparel) were worth some USD240 million in 2021, making it Ethiopia’s second-largest export destination. AGOA eligibility is only reviewed annually, meaning Ethiopia will not regain access until January 2023 at the earliest.
Furthermore, severe foreign exchange shortages have worsened over recent months, with reserves dropping to just USD1.6 billion as of end-2021, according to the central bank -- just 1.3 months of imports cover. The government hopes new receipts from privatisations may start to ease this pressure, but a high debt-service burden alongside rising global prices for wheat, oil and other commodities cast serious doubt on that analysis.
Progress on debt restructuring continues to be virtually stalled. It is now over a year since Ethiopia applied for debt restructuring under the G20 Common Framework for Debt Treatments and, aside from a creditor meeting last September, almost no forward progress has been made. This means the country continues to face a high debt-service burden, expected to average around USD180 million a month over 2022, unless further progress is made on restructuring.
This is putting further pressure on an already strained fiscal position, which is being aggravated by already high inflation and vulnerability to rising global food and fuel prices, heavy depreciation of the birr, a marked current account deficit and extremely low foreign exchange reserves. Ethiopia hopes its plans for new privatisations will bring in much-needed foreign direct investment to shore up the fragile fiscal position. This is not unrealistic -- privatisation of the banking sector in particular will likely attract significant interest -- but it is unlikely to be enough to offset current fiscal fragilities without concurrent progress on debt restructuring.
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