Sustainable Ethio-Eritrean Relations

Major issues to consider

One of the greatest achievements of Prime Minister Abiy Ahmed (PhD) in his short stay in power is bringing peace between Ethiopia and Eritrea, which is an excellent political and diplomatic success. This is also a smart political move on his part to fight established interest groups who could stand against his reform. His visits to Egypt, the UAE and Saudi is also a predictable political underpinning for the success. Be that as it may, as an economist, I would like to point out some of the major economic issues that need to be considered for lasting political and economic ties with Eritrea. This requires understanding the real cause of the war and the cost of the war which will illuminate the policy direction that needs to be pursued so as not to repeat previous mistakes.

Cause of the War
In the study my colleagues and I conducted in 2005, we found the real cause of the war was not a border dispute. Rather it is an economic one. The Eritrean government’s attempt to squeeze beneficial policies out of Ethiopia reached its limit on the eve of the conflict which ignited the war. Second, although scientific evidence was hard to come by, insider informants noted unhealthy competition between the two leaders as one of the major culprits behind the conflict.

Ethiopia and Eritrea signed cooperation agreements following Eritrea’s independence in 1993. After that, 80Pct of Ethiopia’s foreign trade passed through Eritrean ports (which are “free ports” for Ethiopia – however, how “free” they were was not defined in an explicit and transparent manner). Ethiopia was a market for about 80Pct of Eritrea’s exports and the two countries commonly used the Ethiopian currency, the Birr. They also shared the oil refinery at Assab port.

However, there were obstacles to the implementation of the agreements. Whether deliberately or due to negligence by the Ethiopian government, Eritrea took unfair advantage on Ethiopia. The trade agreement allowed tax-free mutual imports of products from each country, although commodities which were sources of foreign exchange earnings were excluded from the agreement. When imported commodities passed through each other’s country, they were considered to be in transit and free from customs duties. The agreement on transport stipulated that Ethiopian Airlines flew to Asmara. Eritrean nationals residing in Ethiopia were also allowed to live and work in Ethiopia with similar status to that of Ethiopians and vice versa.

Ethiopia complained that the agreement was abused by Eritrea. When the US dollar was exchanged at ETB6.25 in Ethiopia, its value in Eritrea was ETB7.2. Contrary to the trade agreement, Eritrea bought coffee and oil seeds for re-export. In addition, the Eritreans allegedly sold untaxed commodities (imported as goods in transit) in Ethiopia, excluding Ethiopian traders from the market. Furthermore, grievance was generated because the Ethiopian government had committed itself to the reconstruction and rehabilitation of the Eritrean economy, before Eritrean independence, signing a USD18.1 million worth of Special Drawing Right loan agreement with the World Bank, without passing on the debt to Eritrea.

On the other hand, Eritrea argued that Ethiopia was being protectionist and discriminating against Eritreans engaging in the Ethiopian Economy. In particular, Eritrea has blamed the northern Ethiopia region of Tigray (where the core of the ruling elite in Ethiopia, including the late Prime Minster Meles Zenawi, came from) for Ethiopia’s protectionist stance and its refusals to accept the Eritrean currency with a value on a par with the Birr. These were the key economic reasons for the conflict

There was also a problem of coordinating macroeconomic policy. The two countries adopted two different development strategies; Eritrea was outward-oriented while Ethiopia was inward looking. Monetary union in such a context strained macro and fiscal policy co-ordination, which was apparent just before the onset of the war. When Eritrea issued its currency, the Nakfa, in November 1997, the Ethiopian government took a position that economic relations with Eritrea should be identical to its other neighbouring countries, using the US dollar as the medium of exchange through letters of credit. This also became one of the major causes of the outbreak of the conflict.
Considering the above factors, one can argue that the Eritrean military drive to the border might have been motivated by an attempt to threaten the Ethiopian government so as to obtain favourable policy, on the assumption that the Ethiopian government was a weak, minority-based government fragmented along ethno-linguistic lines (which was not an unreasonable assumption at that time). The frustration of these assumptions, an impasse on the border, coupled with the arrogance and stubbornness of the leadership in the two countries, led to the war. Thus border dispute was just a pretext.

What should be done?
From this as well as the theory and experience of regional integration in Africa, I recommend the following so as not to repeat the mistake that EPRDF made before the war in dealing with Eritrea. First, Free movement of labour and capital should wait the theoretically highest stage of integration such as “Customs Union”. For instance over 800,000 polish migrants alone came to UK following free movement agreement reached between the two countries . This move changed the whole politics of the UK including it’s exist from Europe Union. In a poor country like Ethiopia, free movement of labour and capital will have inflationary (food and rent among others) consequences and could generate Xenophobia for Eritreans and derail the peace process.

Secondly, until things are sorted out in the coming one to two years through negotiation and institutionalization, Eritrean business person should be treated like any business person from Kenya which should come through foreign direct investment (FDI) channel having a hard currency to invest. Eritrean business person should be treated like any business person from Kenya which should come through FDI channel having a hard currency to invest. Individual Eritreans need also work and resident permit to work/reside in Ethiopia.

In the theory of regional integration free movement of capital and labour is the last stage of union the precondition of which includes macroeconomic convergence criteria (such deficit as share of GDP, inflation and exchange and interest rate target). Only when that happens, say using the COMESA/IGAD convergence criteria that Ethiopia needs to go to the free movement of capital and labour stage.

The other is concerning with the use of Eritrea’s ports. In the past, Ethiopia had a free port agreement with Eritrea. But the agreement has never been clear and transparent. Now, it should be defined clearly. Ethiopia should inquire how different is this from Djibouti? Is it cheaper? From our national interest point of view, we need the two countries to compete in the short run. In the medium run we need to develop our own port (such as near Assab or Djibouti) on a long lease, say 30 to 50 years, basis as Dubai’s DP world is doing where we don’t pay a penny. In return, Ethiopia needs to offer an equivalent benefit for Eritrea/Djibouti. This is crucial for lasting peace.

The geopolitics in the area that includes the UAE and Saudi Arabia in the ports of Eritrea, Djibouti and Somali land; as well as The Turkish and Iran in Sudan should also be brought in the negotiation with Eritrea for both mutual advantages. In addition, the Chinese interest in Djibouti port as part of its “The Silk Road” initiative need also be considered in Ethiopia’s strategy.

Currently China owns over 82Pct of Djibouti’s debt in 2016 and offers over a billion-dollar loan to such a small country in the last two years that is equivalent to 75Pct of Djibouti’s GDP according to the Economist. This means if Djibouti fails to pay, it might hand over its ports (or significant share) to China as did Sri Lanka last year with implications for Ethiopia.

On top of this, the West is watching all this being nearby in one of the naval bases. This will make Ethiopia strategically vulnerable. It has to be recalled that similar China’s loan to Ethiopia has already made Ethiopia strategically vulnerable implicitly entrenching in its sovereign decision making of its prized assets such as the Ethiopian Airlines, Shipping line and Telecom (most likely to China). This geopolitical trajectory needs to be the centre of the negotiation with Eritrea and Djibouti too.

In a nut shell, any agreement and decision need to be evaluated against the principle of mutual benefit and strategic security issues. If it is not mutually beneficial, it needs to be avoided. It has also need to be given all the seriousness that it deserves by going beyond the casual peace accord and the current euphoria.

6th Year • Sep.16 – Oct. 15 2018 • No. 66

Alemayehu Geda (Prof.)

is a professor of economics at Addis Ababa University. He can be reached via

Leave a Reply

Your email address will not be published. Required fields are marked *

Ethiopian Business Review | EBR is a first-class and high-quality monthly business magazine offering enlightenment to readers and a platform for partners.

2Q69+2MM, Jomo Kenyatta St, Addis Ababa

Tsehay Messay Building

Contact Us

+251 961 41 41 41