By Loza Seleshie
Posted on Wednesday, 24 February 2021 19:35
Home to seven million inhabitants, Ethiopia’s Tigray region has been unstable since November of 2020 following the first military operation to root out Tigray People’s Liberation Front (TPLF) rebels. Although armed operations are technically over, economic instability persists. How has this affected Ethiopia’s overall economy?
Ethiopia is going through its worst economic shock in decades due to the combined impact of Covid-19 and the conflict in Tigray. But nonetheless, the economy was still on pace to grow in 2020.
The Tigray conflict emerged when the TPLF leadership contested Prime Minister Abiy Ahmed’s authority. He responded by removing the TPLF from power in Tigray.
According to the World Bank, Ethiopia’s economy grew at an average 9.8% rate from 2008 to 2019. The effects of the Covid-19 pandemic on the economy, coupled with the conflict in the northern Tigray region, lowered growth projections.
The IMF also predicted a major slowdown for 2020, with growth dropping to 1.9%, which would be the lowest rate of growth for Ethiopia since since 2003. The World Bank’s estimates are rosier, with a growth rate of 6.3% for the 2020 fiscal year.
Ratings agency Fitch says: “We do expect more of a hit to growth in FY21 than FY20, but forecast a return to growth rates in the 6%-7% range over the medium term.
Manufacturing and losses
Tigray is home to an important portion of the country’s manufacturing and mining activity. The conflict in Tigray has had a ripple effect on the rest of Ethiopia.
The region hosts 5,120 small, medium, and large manufacturing enterprises, according to a paper published in December 2020, entitled
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There is one industrial park close to the regional capital, Mekelle, that specialises in textiles. Another is in the works: the Baeker Integrated Agro-Industrial Park.
In the aftermath of the conflict, Indian company SCM Knit Tex, which operates in Mekelle, noted that the Tigray factory did not suffer damage because the industrial park was protected by the federal army.
Several international investors are also present in the region, including Velocity Apparelz (UAE), DBL (Bangladesh) and Indochine Apparel (China). Management sources close foreign companies, who asked not to be named, confirmed damages to their factories though did not elaborate on details to The Africa Report.
Others have been more vocal, such as Alaa Al Saqati, head of the Egyptian Industrial Zone in Ethiopia. He said in late 2020 that Egyptian investments in Tigray Region were around $10m. Speaking to The Africa Report on his behalf, Doaa Mansour confirmed losses of $2m.
Saqati will be representing a group of Egyptian investors seeking compensation for their losses. Mansour adds: “We are going to arbitration for the losses. We invested in furniture manufacturing and also electric transformers. As there is no activity, our clients are not paying us.”
Though no law firm has yet been chosen and the process is still ongoing, Ethiopia ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in February of 2020. The commissioner of the Ethiopian Investment Commission, Lelise Neme, stated in December 2020 that it had begun “efforts towards resolving problems faced by investors in the Tigray region and get them back to operation very soon”.
Even in an unstable situation, the country has attractive advantages: one of the lowest wages in the world for textile manufacturing ($26/month in 2019), 8-10 years of income-tax exemptions, no taxes on most exports and land leases with zero charges over a period of 60 to 80 years.
The country’s preferential trade agreements with the US (African Growth and Opportunities Act) and the EU (Everything But Arms) have been incentives for textile manufacturers, mainly from South-East Asia. This “saves 9.6% in costs that would be paid if clothes were made in India” says Arul Saravanan, chief marketing officer of SCM Garments.
Soil rich for agriculture and mining
Prior to Prime Minister Abiy’s rise to power in 2018, Ethiopia had been following a developmental state model. Economic planning through the government’s Growth and Transformation Plans: GTP I (2010-2015) and GTP II (2015-2020) targeted a transition to an export-oriented and industry-based economy.
The Tigray Region is the second-largest producer of sesame seeds in the country. According to data from the trade and industry ministry, “about 44% of the national sesame seed production comes from Amhara Region, followed by Tigray (31%)”.
In 2018, oily seeds – such as sesame– accounted for $363m in exports for Ethiopia, ranking it as the world’s third-largest producer. But since November, there has been “supply disruption as a result of the fighting in the region”, the Ethiopian Commodity Exchange reported in January.
Tigray’s mineral resources have also attracted foreign investment to explore for “gold, base metals, industrial minerals, coal, gemstones, and other ores and minerals,” according to a study entitled Mining Sector Challenges in Developing Countries, Tigray, Ethiopia and Inspirational Success Stories from Australia.
READ MORE Ethiopia – TPLF conflict in Tigray will dampen investor appetite
However, 60%-80% of minerals are mined by artisanal producers, while 80%-95% are mined artisanally for construction minerals like basalt, pumice and limestone, as Rahel Getachew, senior programme officer at Canadian International Resources and Governance Institute, told Africa Mining Market.
READ MORE Ethiopia: Gold mining sees record growth despite Covid-19
But with the arrival of mining companies Altus Strategies (Great Britain), ASCOM (Egypt) and Newmont (USA) – all focused on gold – those figures are likely to change, especially since Tigray is the largest producer of gold, with Ethiopia’s gold exports representing $145m in the 2019-2020 budget year.
As a direct consequence of the Tigray conflict, Ethiopia is losing $20m a month in exports, according to the trade and industry ministry.
Communication, infrastructure and logistics
The regular power and telecommunication cuts have impacted essential economic activities. Services have however “partially resumed in cities including Humera, Dansha, Mai-Kadra and Mai-Tsebri”, according to Ethio Telecom.
- Commercial routes, airports and dry port
The intense fighting from 4-28 November affected all four airports in Tigray: Axum, Humera, Mekelle International Airport and Shire.
Air travel has already been hurt by the Covid-19 pandemic. Ethiopian Airlines declared a loss of $550m related to Covid-19 disruptions.
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This adds to the partial slowdown of other commercial infrastructure and routes. “Our activities have not been affected by the conflict, the import route from Djibouti goes through Afar and doesn’t cross Tigray,” Solomon Zewdu, head of Soltransit, a logistics and trucking company tells The Africa Report. “If there is congestion, it is probably around the dry port,” he adds.
Mekelle dry port is one of eight in the country that have a total capacity of hosting 24,000 containers. While the current state of the dry port has yet to be clarified, Sara Habtu of Addis Ababa University wrote that management difficulties could have “the impact of increasing cost on goods as [a] result of delays [in] the services. In turn, this cost has implications on prices of imported goods in public which have inflation and economic imbalance of the country.”
- Road and rail
Highway 2, connecting Addis Ababa to Mekelle, is the main artery from Tigray to the centre. Though damages have slowed down aid, the Ethiopian government hopes economic activity will resume.
“The road from Addis Ababa to the Eritrean port of Assab is being rehabilitated as a transport artery for international trade,” Abiy wrote in an opinion piece featured by The Africa Report.
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Ethiopian businesses have been trying to rely less on trucks to transport goods. Rail is an alternative. The Addis Ababa-Djibouti railway is operational but “does not go to Djibouti at the moment”, say sources in the transport sector who asked not to be named.
Furthermore, two northward extensions – Awash-Weldiya and Woldia-Mekelle – remain under construction. Issues unrelated to the conflict – including profitability, debt and infrastructure – are at risk of adding more constraints.
Bottom line
In such a climate of tension, the national impact of the regional conflict is being felt: inflation, which had decreased to 18.2% in December 2020, was on the rise once again in January 2021, reaching 19.2%. The IMF’s latest regional outlook predicted a 0% GDP growth rate for Ethiopia in 2021.
While several projects (roads to Mombassa and Assab) and institutional tools (AfCFTA) aimed at boosting the trade and economic growth are underway, they can only do so much.
The conflict in Tigray, along with the overall consequences of Covid, means the country will have more catching up to do to regain a double-digit growth rate.
Moreover, “many of the processes of peace are self-reinforcing. Business cannot really develop until conflict stops, but once started, productive employment can have a self-reinforcing effect”, argues the Institute for Economics and Peace.
Prime Minister Abiy seems to understand this as well, declaring “ending the suffering in Tigray and around the country is now my highest priority”. Africa Insight Wake up to the essential with the Editor’s picks. Sign up Also receive offers from The Africa Report Also receive offers from The Africa Report’s partners