Ethiopia Between Risk and Reform

On 2 April 2018, Ethiopia’s restless new Prime Minister Abiy Ahmed was sworn into power. Since then the Federal Republic of Ethiopia has found itself in a whirlwind of reform. Ethiopia is undergoing its most significant changes since the 1991 birth of the EPRDF ruling coalition under its controversial leader, Meles Zenawi. The last two months have witnessed the realigning of Ethiopia’s economy and bilateral relations with previous foes such as Eritrea and Egypt.

Political risks

Prime Minister Ahmed has hit the ground running in terms of political reforms with the overdue lifting of the State of Emergency that has existed since the abrupt resignation of his predecessor in February 2018. In a landmark move, Ethiopia’s government has released thousands of dissidents in an olive branch to the opposition. This is part of the Prime Minister’s new policy of opening the political space which has included the release of leaders of the opposition. These policies have proved widely popular amongst Ethiopia’s population, especially in the Oromia region where the Prime Minister hails from.

Of all the reform policies by Prime Minister Ahmed the one that has captured the imagination is his policy of rapprochement towards Eritrea. In 2000, Ethiopia under its late Prime Minister, Meles Zenawi signed an agreement with Eritrea to end the bloody border war between the neighbouring states. The agreement came to be subsequently known as the Algiers agreement and it demarcated the boundary between Ethiopia and Eritrea. On 5th June 2019, Ethiopia’s new, reformist Prime Minister Dr Abiy Ahmed agreed to “fully implement” the Algiers agreement and cede land back to Eritrea.

This is a monumental shift in Ethiopia’s political consensus forged under the transformative Meles Zenawi. The risks in the long term are that such a deal may empower other ethnic groups within the Federal regions to agitate for changes in boundary demarcation now that the new government is seen as responsive. However, it is worth noting that Prime Minister Abiy is universally popular in all regions of Ethiopia and especially his home region of Oromia, which was at the epicentre of anti-government protests from 2014 onwards.

In another landmark move, Prime Minister Ahmed recently met with his Egyptian counterpart, President Abdel Fattah al-Sisi where both discussed the ongoing tensions over the Nile. Egypt has long been opposed to Ethiopia’s Grand Renaissance Dam, a $4 billion hydroelectric project that harvests the Blue Nile to power Ethiopia’s economy.  For years, negotiations between Ethiopia and Egypt have been deadlocked with the latter believing the Grand Renaissance Dam would harm Egypt’s access to the Nile which is critical for its industrial and agricultural sector.

For the first time, in a landmark statement, an Ethiopian leader has promised that Egypt’s share of the Nile will be preserved by Ethiopia. As part of the ongoing agreement, both sides (along with Sudan) will also set up an infrastructure fund for investing in the three countries. In the medium term such a policy of deescalating tensions with Egypt allows Ethiopia’s government to devote political capital on more pressing domestic concerns such as the liberalisation of what is considered Africa’s fastest growing economy.

Economic risks

On 6 June 2018, Ethiopia’s new government announced that the state will end its decades old monopoly in key sectors such as telecoms, energy and aviation. Reformist Prime Minister Ahmed is keen to modernize Ethiopia’s economy by privatizing key state-owned enterprises and limiting the state’s tight control on all aspects of the economy.

Ethiopia’s government hopes such increased inward investment will allow the state to create jobs for its increasing numbers of unemployed young people. In a country of 105 million people, absorbing more disaffected youth into its labour markets will prove crucial to Ethiopia’s future stability. Of interest to foreign investors is Ethiopia’s telecoms monopoly, Ethio Telecom which will be part privatised. Already major foreign operators such as MTN Africa have already signalled their interestin Ethiopia’s thriving telecoms sector.

Another lucrative asset to be privatised is Ethiopian Airlines which is considered Africa’s most successful airlines in terms of operations and profits. That the Ethiopian government is willing to privatise its previously untouchable cash cows shows how serious Prime Minister Ahmed’s administration is towards structural economic reform.

If done correctly, the liberalisation of Ethiopia’s economy offers substantial opportunities for the state and investors in the long term. According to the IMF, in 2017, Ethiopia’s economy was among the fastest growing in the world and it is set to expand 8.5% this year. The risks of privatisation to Ethiopia’s economy are minimal as analysts have long argued that Ethiopia’s economy requires an injection of competition to fulfill its enormous potential.

Going forward, Ethiopia’s target to attain lower-middle income status by 2025 will only be reached when it is able to limit the outsized role played by its large, state-owned enterprises. Finally, Ethiopia’s opening up of key sectors was in response to the visit of the IMF Managing Director in December 2017, where Ethiopia was advised to abandon its strategy of debt financed growth to maintain its impressive annual growth rates. Although such a strategy enabled Ethiopia to record impressive growth rates for the last several years, it is not sustainable in the long run as state-owned enterprises have not been able to create enough jobs for Ethiopia’s population of 105 million.

This article was first published on Global Risk Insights, and was written by Bashir Ali.