Déjà vu: Will War-Economy Status Prolong to Shatter Private Sector Hope?

The coming of Abiy Ahmed (PhD) to the helm was received with great enthusiasm and hope among the public. The expectation that it carried was that of a stronger private sector, a deviation from the administration of his predecessors. Now after a military engagement with his former bosses, the TPLFites—now designated as terrorists—many are wondering if he could perhaps end up in a similar déjà vu moment like that of his ally to the north, Isaias Afwerki. Will Abiy keep his promise of a strong private sector? Will the current war-economy status totally shatter the glimpse of hope for a vibrant private sector? EBR’s Bamlak Fekadu investigates.

It was with a promise of a divine-like future with which Eritrea seceded from Ethiopia back in 1991. Isaias Afwerki, the secession’s mastermind, promised a booming private sector, the liberalization of the tiny nation’s rich natural reserves, and the lifting of millions out of poverty. Many in Africa and the West saw a rising star-nation to the East. Well, it ended with disappointment for many Eritreans. Now, 30 years after the much sought-after independence, Eritrea has ended up being the second highest source of migrants in the world only after Syria, a war-torn civilization besieged by ISIS militants and at risk of losing its timeless human civilization to war.

In 1998, war broke out with Ethiopia. The West somehow sided with the then leader of the Tigrayan People’s Liberation Front (TPLF) and Ethiopian Prime Minister—the late Meles Zenawi. Isaias’ fear and mistrust continued even after the war came to an end. Isaias expressed his anger by shutting down embassies and expelling diplomats. The West responded in kind—arms embargo, travel bans, economic sanctions, and others. Eritrea found itself on the receiving end of it all.

As the no-peace-no-war status remained for two decades between the two nations, Eritrea lived under the worst command economy for years induced by a war economy. The little hope for opening up the private sector was finally lost in vain. The economy’s priority remained supporting and preparing for a potential war with its neighbor to the south.

“From 1993-98, development of the tiny private sector was a top goal, but with the outbreak of war in 1998, national security became the economic and political imperative,” WikiLeaks reported in 1998, attributing the statement to the then Eritrean Economy Minister, Hagos Gebrehiwot, in his conversations with the then US Ambassador to Eritrea, Ronald McMullen.

When Prime Minister Abiy Ahmed came to power, many thought Ethiopia was on the path of building a more robust private sector with hopes of saving an economy that was alleged to have fallen under a state monopoly, among many other challenges. The young and ambitious Prime Minister went as far as entertaining the idea of liberalizing the giant monopolistic parastatals, Ethiopian Airlines and Ethio Telecom—an unthinkable move just a few years prior to his ascent to power.

His government also embarked on a series of policy reforms to allure private investors both at home and from abroad. Abiy has taken tentative steps to open-up Ethiopia’s economy. His administration partly liberalized the logistics and telecom sectors and also allowed foreigners to invest in power distribution and industrial parks development.

The sale of the first private telecom license, in which The Global Partnership for Ethiopia, now operating under the name Safaricom Telecommunications Ethiopia PLC—a consortium of Safaricom, Vodacom, Sumitomo, and other financiers—acquired a telecom service license for ETB850 million, has been the major demonstrator of the Premier’s commitment and progress towards liberalization.

Even though the planned privatization of Ethiopian Airlines has been canceled, the government has said it will go ahead with the partial privatization of Ethio Telecom and has already expressed interest to welcome bidders. The transport sector has also experienced some changes and private operators are now allowed to be involved in moving cargo shipments under free on board (FoB) shipping terms.

These are demonstrations of the government’s commitment towards privatization. The ten-year perspective plan of the government has further taken private sector development at the center of the governments’ growth and development plans. However, the peace and security problem in the country is feared to create a dent on this plan.

Although the conflict had a years-old background, the first bullet fired on the night of November 3, 2020, was not only the whistle launching the war; there is also fear that it might also mark the beginning of the end of hopes and expectations for a strong private sector. The already struggling economy slid to near rock bottom, forcing the government to deviate from original promises.

In what the government referred to as a conspiracy against it, the cost of goods and services shot up after the military engagement commenced. The habit of concealing large volumes of metal and other goods continues to make everyday headlines. The government slowly tightens its grip on the economy.

The National Bank of Ethiopia (NBE) set a series of restrictions including limits on withdrawals, transactions, and cash holdings. The central bank recently ordered the temporary freezing of all collateralized loans given by all commercial banks, through a simple text message. The notification had offered no official clarification on whether the same rule applied to microfinance institutions (MFIs) with an outstanding credit disbursement of ETB69.4 billion. The banks suspended all lending pending further clarification from NBE at the time.

Later on September 20, 2021, the institutions were informed of their exemption from the freeze irrespective of the types of loans they issue, according to Asfaw Abera, Director of the Microfinance Institutions Supervision Directorate at NBE.

Officials of the central bank have justified their sudden decision as a move necessary to control the exchange rate in the parallel market after grey market rates were traded at the historic-high premium of 50Pct above the official rate. Commercial banks’ outstanding credit to the private sector grew by 125Pct in July, four times the annual growth reported last fiscal year.

Prior to loan restrictions, NBE undertook a series of other limitations beginning in early 2020. This includes the prohibition of undertaking in excess of five weekly cash transfers from a single bank including via mobile, internet, and other electronic channels. Business owners’ tradition of depositing on a daily basis drastically decreased owing to the limitations.

Property cane and other similar decisions are equivalent to violating a person’s constitutional rights apart from discouraging private investments. The decision is highly indicative of the government’s fear of the influence of laundered money tipping the odds of victory in the military confrontation with the outlawed TPLF.

Other than NBE, other ministerial entities have also put a price cap on retail cement imposed since June 2020—though recently rescinded. The government is also seen in the business of supplying some food items through the various facilities it set up.

Even though NBE has tried to loosen its tight grip, one only wishes it is not too little too late as it has already sent shock waves in the business community.

Tewodros Shiferaw, a serial entrepreneur, businessman, and Owner of Rosetta General Business, a conglomerate that includes Rosetta Real Estate, Nahoo Television, and Guzo Go, an application for online ticketing service, argues the directive has widely impacted real estate businesses established to profit by selling houses. For Tewodros, the new directive dampens sales and could result in loan defaults or the incapability of paying salaries.
“Such moves could lessen investors’ appetite,” Tewodros says.

Tewodros is not the only one who felt the shockwaves. The restrictions have affected 15Pct of coffee crops in the country’s southwestern regions, according to Hussein Ambo (PhD), President of the Ethiopian Coffee Growers and Exporters Association, which has 150 members. Hussein went as far as expressing his fear that the proclivity of the government seems like it’s diving into the command economic system.

Although the business community sees the worrisome consequences of the government’s stringent policies aimed at controlling the movement of cash in the economy, there are experts who understand the root causes of these policy interventions. “We are in a war economy and the state is trying to handle the crises that the TPLF and its supporters have caused,” Alemayehu Geda (PhD), Professor of macro and international economics at Addis Ababa University argues. “They were borrowing money from banks by collateralizing their assets and making off with foreign exchange after exchanging it in the parallel market,”

In a war economy, the public obligation is to do what is necessary: to support the military effort to protect and defend the home territory, and to especially maintain the physical well-being, solidarity, and morale of the people. These may not be easy tasks in the months ahead, indicates a paper published in 2001 by James K. Galbraith on JSTOR, a digital library.

Galbraith’s assertion seems to perfectly fit the latest decision by the new Chief Administrator of Amhara Region, Yilikal Kefale (PhD). Yilkal, who during his inaugural speech said fighting TPLF out of his regional state would be his priority, shifted the entire annual budget and public and private resources to fighting the insurgence in various towns. The region that approved an annual budget of more than ETB80 Billion for the 2020/21 fiscal year is compelled to invest its entire annual budget in an integrated response to halt TPLF’s military progression in the region.

The region’s latest decision came at a backdrop of rising dreams of a more robust private sector in towns such as Debre Berhan, a historic town established in the 15th century by Emperor Zara Yaqob, now a fast-growing industrial city. In the three consecutive years following 2018, Debre Berhan saw a historic-record of investment licenses issued for private sector developers, among other economic advancements. Politicians in the region were once quoted saying they would build the “second Addis Ababa” referring to the promising growth of investment in the town.

The town of Gondar, which was prepping to see hotel investments by big private sector tycoons such as Haile Gebre Selassie, might now also be on second thought. Haile’s ETB1 billion project at Gorgora, a town and peninsula south of Gondar on the northern shores of Lake Tana, will have to be put on hold for the foreseeable future. The government’s plan of development at the same site will face similar fate.

Understanding the impact of war on a nation’s economy has been attempted through the years. One such attempt was made by Clifford F. Thies and Christopher F. Baum, in their paper published in CATO Journal in 2020. The study analyzed data from the history of wars beginning mid-19th Century to the early 21st Century. To understand their economic impact, the study classified wars into two categories: Magnitude 1-5 and Magnitude 6 and 7.

Magnitude 6 and 7 wars, which the current Ethiopian war seems to be categorized into, have a defining criterion of at least 1000 battle deaths over a 12-month period. All variants of the model show that conflicts of Magnitude 7 reduce per capita GDP by 16 to 24Pct.

Measuring the total cost of war involves the opportunity cost of resources used to carry out the war, the loss, destruction of human capital, and a reduction in GDP per capita. According to Thies and Baum, careful measurement of war in the context of a large data set indicates that war is not good for business. Countries that suffer from war underperform in terms of production and consumption. GDP per capita falls because of lower labor and total factor productivity, presumably due to the destruction of existing physical and human capital, the lack of investment in new physical and human capital, and reduced gains from both internal and external trade.

Ethiopia, like most countries in the rest of the world, has already been under war economy status due to Covid-19. The pandemic has left visible bruises on the private sector. Conference tourism, once hope-filled service sector, has been hit so hard that no one seems to have a clear idea when it will get back up if it ever will. Due to Covid-19, Ethiopia’s real GDP growth, which experienced double-digit growth for about 15 years, fell to 6.1Pct in 2018 and is predicted at 6.4Pct in 2021. Foreign direct investment (FDI) flows totaled USD2.1 billion in 2020, a 17Pct drop from 2019, according to the UN Conference on Trade and Development (UNCTAD), and includes investments in the manufacturing, agriculture, and hospitality sectors. The pandemic hit the once-thriving hospitality sector harder and like no other.

“The development of the private sector is not seen as a priority: this is a mistake,” reads a document published by Lisa Curtis et al in 2010. The authors of the document argue Private Sector Development (PSD) in Conflict-Affected Environments (CAEs) must be taken seriously and shall not be done in a business as usual manner. A business as usual approach towards post-civil war response in Rwanda had an impact of its own on PSD.

PSD programming should be an integral part of the conflict management process and should not be introduced later. In fact, not adopting PSD programming early enough can seriously undermine conflict management efforts. Historically, PSD has only been considered to influence the economic development aspects of peacebuilding. This not only underestimates the value of PSD, but also leaves open the dangerous possibility that PSD programs could undermine other aspects of the conflict management process, according to Lisa and her colleagues.

“Three important points can potentially show us that this war will not lead us to a command economy,” argues Endalkachew Sime, Private Sector Specialist and former State Minister for the Planning and Development Commission. “This type of war—a law enforcement engagement—which the government entered in response to the national security threat, is one reason.” Endalkachew also seems to be confident in the attention given to the private sector as can be seen in the governmental programs of the Home-grown Economic Reform and Ten-year Development Plan—with both having private sector-led economic growth at their core.

“So, yes the war has a lot of negative impacts on previous intentions and plans, but I think these are only temporary detours and the government will bounce back to its roadmap,” stresses Endalkachew.

A prolonged war not only undermines PSD, but might also encourage foreign private-sector profiteers. As much as war economies are bad for local and law-abiding business people, it could also mean a profit bonanza for foreign businesses that even breed conflicts to make some economic advantages. Such merchants of death have contributed so much in the conflicts in Sudan, South Sudan, northern Nigeria, and the Democratic Republic of Congo. Criminal networks and gangs based in New York, London, Dubai, and other financial centers around the globe make their millions by providing arms to the warring factions while millions of innocent citizens suffer in the conflict.

There is no denying that war encourages fear and mistrust in leaders’ minds and their policies. Open economic policies or thriving private sectors are not typical to countries with leaders in war. Whether Abiy will put in place work around the current war economy status and keeps on the track towards a stronger private sector or end up in a déjà vu moment with his Eritrean ally, is yet to be seen. EBR

10th Year • Dec 2021 • No. 102