Previous Quarterly Editions
Expropriation Risk: 66 67 66 70 ▲Political Violence Risk:59 59 60 66 ▲Terrorism Risk:45 42 42 42 ►Exchange Transfer and Trade Sanction Risk: 64 64 64 64 ►Sovereign Default Risk:75 74 74 74 ►
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Protest intensity in 2022 and Q1 2023* 2022 Q1 2023Cost of living : Low LowAll protest: Low Low
Cost-of-living protest risk in 2023*Wage protest: Medium Food/fuel policy protests: High
*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 calculations, see the introductory essay.
Inflation in Ethiopia is at one of the highest rates in the world at above 33% for 2022, with the economic poor, civil servants, and even the middle class struggling to make ends meet. This is likely to continue throughout 2023 – expected, according to IMF, to average 28.6% – because of alarmingly low foreign currency reserves, printing of money (through borrowing from the central bank) to fund projects of Prime Minister Abiy Ahmed (including a reported above USD10 billion new palace), and instability and climate change-induced disruptions to agricultural production in many productive areas of the country. While agricultural output is expected to increase in 2023 – due to
return of peace in areas that were under conflict in 2022 – the increased cost of imports and depreciation of the currency will maintain inflationary pressures.
The country’s public debt also remains high, reportedly owing external debtors around USD26 billion, and it faces a high debt service burden of more than 20% of export revenue. Despite improving relations with Western countries following the signing of a peace accord to cease hostilities in northern Ethiopia, the country is still not receiving direct budgetary support from international partners, with aid mainly focused on humanitarian needs and through non-state actors. The debt levels can be expected to increase, with recent announcements of over
USD622 million from China, under unknown terms, and Abiy’s push to build a new palace with investment from unknown sources.
Hopes for official debt restructuring have not made serious progress and can be expected to be complex due to the high exposure to Chinese debt (which has similarly stalled restructuring in other countries, notably Zambia – a breakthrough in Zambia could provide a model and hasten discussions on restructuring Ethiopian debt). Resuming tensions between Egypt and Ethiopia over the Grand Renaissance Dam may further complicate debt restructuring talk and reduces chances of Ethiopia getting a bailout from Gulf states.
In view of this situation, the government accelerated earlier plans to reduce fuel and wheat subsidies, while simultaneously being unable to import sufficient fuel, which subdues domestic economic activity. The government has also slowed down investments in public infrastructure, as the country is expected to record its largest budget deficit ever in the current fiscal year. Moreover, very little reconstruction work has started in war-torn areas (expected to cost above USD28 billion) and is unlikely to change without significant international support. Crucially, government debt levels have constrained the government’s discretion to increase civil servant salaries to help them cope with high inflation.
The government is reportedly working on reform of tax laws and is expected to heighten tax collection efforts. Furthermore, the government has recently unveiled a policy allowing regional/state governments to tax immovable property. While these changes may generate some income, particularly in the capital, Addis Ababa, they are unlikely to lift the tax/GDP ratio noticeably.
While the combination of inflation and austerity have fed popular discontent, this will not affect the government’s electoral prospects, as national elections are planned only in 2026. Widespread unrest or instability is also unlikely. Nevertheless, the economic difficulties can feed into broader fragilities in the country, and reduce the ability of the government to address other sources of instability and insecurity.
The return of peace in northern Ethiopia after the signing of the peace accord in October 2022 has markedly improved hopes economic performance– 5.3% real GDP growth in 2023, from around 3.8% in 2022. Nevertheless, the growth rate could slow down without a breakthrough in debt restructuring talks. Moreover, economic growth is unlikely to make up for the troubles from high inflation.
To reduce the budget deficit and raise foreign currency reserves, the government may move forward with further opening of the telecom and banking sectors, and privatise public enterprises.
The economic trajectory in the past decades has decidedly been towards privatization. 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.
Ethiopia has recently committed to increase its military presence in Somalia to support the fight against the terrorist group Al-Shabab, which sought to penetrate south-east Ethiopia in September 2022. The group is under significant pressure within Somalia and will likely have limited wherewithal to launch attacks in Ethiopia.
Domestic political terrorism poses a greater risk. Armed groups in Oromia, Benishangul-Gumuz, and Gambella periodically attack business interests or infrastructure, and armed factions across the country, including state security forces, have been implicated in human rights abuses including attacks, killings, and arbitrary detentions based upon ethnic profiling. Intercommunal violence in parts of Amhara and Southern regions also risks violence. Nevertheless, characterisations of political violence as terrorism remain contested.
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Overall political and stability prospects have improved with the peace accord in northern Ethiopia. Nevertheless, there are still potential triggers, especially due to unresolved contestations over land between Amhara and Tigray regions. Other inter-regional boundary conflicts have also intensified, between Afar and Somali, Oromia and Somali, and Oromia and Sidama. The Afar-Somali conflict in particular poses threats to the key outlet for Ethiopia’s exports and imports through Djibouti port.
Moreover, the civil war in Oromia has intensified, with large parts of the region suffering from limited rule of law and security. Low level insurgencies and cross-border skirmishes also affect the Gambella region. The growing infighting between the Oromo and Amhara factions of the ruling party may also lead to realignments that could be destabilising.
The National Dialogue Commission is expected to start actual consultations, after months of preparatory work. The process could offer a formal outlet for frustrations. Nevertheless, key opposition forces remain sceptical about the process, and popular awareness of the institution and its role remain limited. In view of fundamental differences about historical issues and the nature of the state and the political system, perceptions of lack of inclusivity and neutrality of the process and supposed outcomes of the dialogue may intensify tensions and instability.
Accordingly, the national political and security situation will remain fragile. These tensions, alongside broader economic and financial troubles, will hinder efforts to resettle millions of displaced people, and may even generate new rounds of displacement.
The peace accord in northern Ethiopia has largely held, and relations with Western countries are improving. There is therefore some hope that the U.S. and European Union would resume direct budgetary support and reconsider Western economic sanctions on Ethiopia, notably exclusion from the duty-free access to U.S. markets under the African Growth and Opportunity Act, mainly affecting textile and apparel exports. Both Washington and Brussels continue to provide humanitarian assistance to Ethiopia.
While the Ethiopian government can be expected to intensify initiatives to implement transitional justice, its rejection of the United Nations’ International Commission of Human Rights Experts on Ethiopia to investigate crimes related to the civil war will delay removal of sanctions and resumption of economic support. In this context, the alarmingly low levels of foreign reserves will remain, and the budget deficit may increase.
Expectations for debt restructuring have increased following the signing of the peace accord. Nevertheless, uncertainties remain, including due to increasing West-China geopolitical tensions, and a breakthrough may not be imminent.
To avoid default, the country will need to continue to allocate more than 20% of export income to service its external debt, which will further increase the budget deficit, and constrain already suppressed public investment levels. While planned privatization efforts and opening for external investment of the banking sector offer hopes for increased flow of foreign reserves, these are unlikely to address the massive gaps, which require a significant injection of capital 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 Eurobond in 2024 without debt restructuring, the higher the chances of default.
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