The Shadow of Conflict Business and Insecurity in Ethiopia

Once lauded as Africa’s rising economic star, Ethiopia faces a persistent challenge: conflict. Over six years, the country has navigated a period of turbulence that has significantly impacted peace and security, posing a formidable obstacle for businesses operating within its borders. This article by EBR’s Samuel Getachew delves into the multifaceted impact of these conflicts, exploring the specific hurdles entrepreneurs face. Through consultations with business leaders and a comparative analysis of other countries’ experiences, the article proposes potential avenues for addressing these issues and fostering a more conducive environment for business growth.

Amid recurring conflicts in many parts of the country, Ethiopia’s most significant causality has been its economy. The conflict in the state of the Amhara, home to more than a quarter of the country’s population, has its dent in the economy’s making. The conflict between the Ethiopian Defense Force and ‘FANO’, a militia group composed of young people primarily identifying themselves in the Amhara region, Ethiopia’s second-largest federation member, was hoped to end shortly. However, it took a year while the conflict persisted. The youth militias initially formed supporting the federal government’s call for backing its war in Tigray to restore law and order. However, they are now involved in armed struggles against it. The consequence has affected the region’s economy and the country’s overall development. Not a small portion of the state is in ruins because of the war. The Amhara regional government estimates its economy’s damage to be far more than ETB 15 billion as of March of this year. However, as the calculation didn’t consider the losses incurred by the private sector and citizens, a holistic approach would make the figures fold.

Investors who have invested in the region’s economic activities are now contemplating their future as their businesses have slumped against a backdrop of diminishing purchasing power of citizens who live there, as the war eroded their core economic activities and incomes.

From roadblocks to random attacks that have made their businesses challenging, several coffee, sesame, and pulses exporters EBR spoke with said they are operating in a challenging environment that keeps costs mounting while income doesn’t match. This is also the case with businesses engaged in local and merchandise businesses.

In the last decade, Ethiopia has exported most of its agricultural commodities to the United Arab Emirates, Saudi Arabia, Japan, Holland, and China.

Exporters have reported being forced to pay ransom for their drivers with disruption of activities at various farms, which has ultimately reduced their bottom line. Not only have that, transport costs have further skyrocketed because of the consistent fuel priced changes and risks of transporting in the Amhara region. Indeed, as other logistical hurdles continue, the situation has pushed their costs up, making them less competitive in the international market.

Alemayehu Mandefro, a small coffee trader in the state of the Amhara who provides the commodity for big exporters in Addis, said the ransom payment has become so frequent that it has become difficult for him and his peers to transport commodities to the capital that are destined for the export market.

“All drivers now exaggerate their prices to transport our products, and many reports of being taken in for ransom payment that they cannot raise themselves, and we are forced to pay for their release and that is added to our cost”, Alemayehu said, wondering how long they can sustain such extortionist business practices. Even businesses engaged in local commodity trading have worse experiences that are continually thinning their margins unless they increase prices. Increasing selling prices further affects slow business as a considerable portion of the region’s population has been affected by the loss of income because of the conflict.

Exporters are further affected by a new policy change that impacts their operations. The Ethiopian government has announced plans to open the export market to international competition. This sector, protected for local investors only, will now be open to everyone.

Last month, Prime Minister Abiy Ahmed announced his administration’s plan to open the export sub-sector, allowing international brands to enter the local market and compete with local exporters. The government, desperate for foreign currency generation, saw the policy change necessary to sustain the economy. The government wants to capitalize on the nation’s designation as the “original home of coffee” to attract foreign investors who can export in bulk and generate more foreign currency to help solve its lingering debt stress.

The move has yet to be received well by local exporters.

“In the last year, we have faced a number of challenges, including ransom requests from our drivers, a delayed delivery of our products and the restrictions of our travels to our farms to ensure quality of our products and now, the government that was expected to support us solve these problems is opening the market for international coffee buyers with bigger resources to come and break the local export market”, an exporter who asked to remain anonymous complained.

The majority of his peers share his sentiments.

Some exporters have been forced to turn to the local market as the government continues to demand the bulk of foreign currency earned from export, leaving them with a small fraction that is becoming increasingly more difficult to sustain as export is essentially only profitable if complemented with import. Now that the government takes most foreign currency from exports, exporters have less foreign currency in their retention accounts to import commodities they sell at high margins. Leading Ethiopian brand-name coffee exporters are now in full swing in the capital, some even selling their brands at inflated prices in newly acquired cafes instead of exclusively focusing on the export sector.

One of the owners of such a brand in Addis Ababa, where luxury coffee shops are abundant in the posh neighbourhoods of Bole and Sar Bet, where the affluent and upper-middle-income Addis Ababans reside, said the local market is more viable. He hopes his loyal customers will stay with him as more international competition cements in Ethiopia.

“We sell our cup of coffee for more than 100 Birr. We hardly hear any complaints when we increase our prices. It is no cost to ship to an international destination and wait for payment when we can do it at home and grow the business,” he said, echoing the feelings of many coffee exporters who have either opened local chain coffee shops and cafes or joined the real estate market as they grapple with stiff competition.

Last year, the Ethiopian government announced it had earned about USD 1.3 billion from its coffee exports, making the commodity its most valued export item. The figure is lower than expected earnings, reflecting the challenges many exporters face, including increasing coffee products from other nations, from emerging coffee exporters, e.g., Uganda, to Vietnam, the world’s second-largest coffee exporter.

Vietnam’s success is belated. Having studied Ethiopian success in the 1980s and then inviting leading Ethiopian scientists to migrate to the South Asian nation in its bid to become a dominant exporter of coffee beans in the early 1990s, Vietnam has been unable to replicate Ethiopian success.

For Ethiopia, it has been an uphill battle emulating such a sterling success story.

The Ethiopian coffee brand, made famous by Starbucks, continues to experience sluggish growth. Ethiopia primarily exports raw beans. As roasting, blending, and marketing—the stages that add significant value—often happen elsewhere, the country doesn’t have control over brand image and profits, which has affected its gain from coffee. Even in exporting raw materials, other producers such as Brazil, Vietnam, and Uganda have invested heavily in improving yields and processing capabilities, making them strong competitors in the global market.

Interestingly, there is also a significant new coffee buyer emerging in Asia. China has become a major destination for Ethiopian Coffee. Its growing economy and market size create a large market for Agricultural produce from Africa without tariffs and quota systems.

With the growing economic integration of business and foreign investment between China and Ethiopia and the latter facing chronic shortages of foreign exchange, some Chinese investors have turned to the coffee business in Ethiopia to generate foreign currency to cover their imports.

Lifan Motors, a maker of affordable Chinese cars in Ethiopia, was one of the companies that started the coffee business in 2017. The company decided to enter the coffee market, use its hard-earned local currency for its agricultural business, and generate foreign currency by marketing it in the Chinese market.

But that dream died soon after, as the nation’s lack of security interrupted its agriculture business. The lack of easy logistical means made transporting its coffee products across the country very challenging. Eventually, it also announced the closure of its car business in Ethiopia.

As has been the case for entrepreneurs who decided to remain under the radar on delicate topics that might be critical of the government or its lack of security to such exporters, several coffee exporters have chosen to speak off the record.

One such exporter told EBR that the last few years have made his life difficult. Now, he is contemplating either leaving the sector, venturing into a different field or trying the coffee business in Uganda, a country many Ethiopian entrepreneurs have entered in the last five years.

“We live in fear and there is no [reliable] peace across the nation. And our costs keep going up regularly with higher taxes, with [frequent petty] bribes that are expected from us and with ransom we are asked to pay [in many check points]. We are also dealing with staff members demanding that we pay them more besides the continued requests for financial contributions by the government are making business uncommon for many”, he told EBR.

“He said, in the end, we are in business to earn a living, and if our hard work does not produce a result, what is the point of being in such ventures”?

Ethiopia, a nation that used to be a beacon of the African rising narrative, has been in precarious peace and stability in the past six years. The country has gone through two rounds of bloody internal wars in the northern part, and a constant conflict has also been in the western part of the country. These conflict-ridden regions almost account for over 60% of the country’s landmass and are significant sources of export items. They also interconnect with the remaining areas of the country, making it very challenging for businesses. The conflict has indeed made business with high risks that sometimes cost lives and lifetime fortunes.

The Tigray conflict, for instance, which erupted in November 2020, has been the most prominent source of instability. However, its roots are more profound, drawing upon long-standing ethnic and political tensions. The ensuing violence has displaced millions internally, disrupted vital infrastructure, and instilled a climate of fear and uncertainty. This atmosphere directly translates into a multitude of challenges for businesses.

Now, the second most prominent member of the Ethiopian Federation, the State of the Amhara, is also going through a similar bloody war, which is almost a year since it ignited. The situation in the State of Oromia, the largest among the member states of the Ethiopia Federation and Benishangul, another very resourceful member of the federation, is also not a safe place for business.

One of the most immediate consequences of these conflicts is the disruption of supply chains and logistics. Damaged roads, bridges, and communication networks significantly impede the movement of goods and services. This not only hinders the transportation of raw materials and finished products but also disrupts essential services like banking and telecommunications, further crippling business operations. Imagine a garment factory needing help to receive its fabric due to closed roads or a coffee exporter facing communication blackouts that prevent them from finalizing crucial international deals. The domino effects of such daily occurrences are undeniable, leading to production delays, missed deadlines, and lost revenue.

Furthermore, conflict breeds an environment of heightened insecurity. Threats of violence, both physical and extortion-related, deter investment and hinder business expansion. Fearful of looting or property damage, entrepreneurs hesitate to invest in infrastructure or expand their operations. This stagnation stifles economic growth and innovation, creating a vicious cycle where the lack of economic opportunities can further fuel discontent and instability.

The financial sector is not spared either. Conflict often leads to currency fluctuations and capital flight. Investors become wary of the volatile situation, withdrawing their funds and seeking more stable markets. This reduces businesses’ access to critical credit, hindering their ability to grow and scale. Imagine a promising startup needing help to secure a loan for expansion due to a risk-averse banking sector in a conflict zone; the startup will remain underfinanced, missing resources it will need to take off. Besides, banks also need help to recover their loans as conflict makes it difficult for businesses to service loans.

The two-year war in Tigray has led to a significant problem with uncollected loans that have made the profit of some banks significantly low. Wegagen Bank, one of the earliest established private banks, is a victim of the Tigray war as a quarter of its branches operates in the State of Tigray. News reports indicate that Wegagen alone lost around 2.3 billion Ethiopian Birr (ETB) deposits due to the war. This stemmed from inaccurate reports that its branches housed firearms, causing a loss of customer confidence. The Central Bank reported that Wegagen Bank’s non-performing loans (NPLs), specifically in Tigray, stood at 1.2 billion ETB in the first year of the war. Other banks have also suffered significantly.

The impact of conf lict extends beyond the immediate economic sphere. Social unrest can lead to a decline in consumer confidence. People become hesitant to spend disposable income, further dampening economic activity. Additionally, skilled labour can become scarce as individuals flee violence or are forced to relocate. This departure of human capital deprives businesses of essential expertise and experience, hindering productivity and innovation. One can mention the exodus of medical doctors from Tigray to the United States during the conflict and how rehabilitation became complex when the peace was restored. The same is happening in the State of Amhara, the consequence of which will be felt once the conflict is over.

Addressing these challenges requires a multifaceted approach. Peacebuilding efforts are paramount. Fostering dialogue, power-sharing agreements (where applicable), and addressing underlying grievances are crucial steps towards establishing a sustainable peace. With a secure environment, any attempts to revitalize the economy will be built on solid foundations.

The government has a critical role in rebuilding infrastructure and restoring essential services. This includes repairing roads, bridges, and communication networks to ensure the smooth flow of goods and services. Additionally, establishing strong law and order is essential. Businesses require a secure environment to operate freely without fear of violence or extortion.

The international community can also play a significant role. Humanitarian aid is crucial in alleviating the immediate human suffering caused by the conflict. Additionally, international development agencies can provide technical assistance and financial resources to support infrastructure development and economic recovery programmes.

Beyond these broader efforts, there are steps businesses themselves can take to navigate the challenges of a conflict zone. Diversifying supply chains and building redundancies can help mitigate disruptions caused by infrastructure damage. Investing in security measures can deter theft and vandalism. Additionally, fostering strong relationships with local communities can build trust and create a more supportive environment. Businesses can also engage in social responsibility initiatives that address the community’s needs, fostering goodwill and a sense of shared prosperity.

The road to economic recovery in Ethiopia will undoubtedly be long and arduous. However, a more vibrant business landscape can be paved by prioritizing peacebuilding efforts, rebuilding infrastructure, and fostering a secure environment. Businesses, for their part, can adapt and innovate within the constraints of the situation while also contributing to positive social change through responsible practices. Ethiopia can fulfil its potential as a regional economic powerhouse only when security and economic prosperity go hand in hand. EBR

12th Year • May 2024 • No. 129

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