Instability may make Ethiopia a hard sell to foreign investors

Once a frontier market superstar, Ethiopia has seen its investment lustre dimmed by conflict and the coronavirus pandemic.

Since Ethiopian Prime Minister Abiy Ahmed declared victory over the Tigray People’s Liberation Front (TPLF) in late November, Tigray’s airspace has opened and businesses are gradually picking up again, despite ongoing tensions and a vow by the TPLF to continue fighting.

Abiy even visited the embattled city of Mekelle on December 13, his first trip to the Tigray region since hostilities broke out there on November 4.

During his visit, Abiy, clad in military camouflage and a green beret, promised that work was under way to restore phone and internet connectivity to the northern region after services were cut. But Tigray’s internet blackout persists, while phone calls are possible in only about a dozen of the region’s towns.

It’s not a novel occurrence. In 2019, there were eight internet shutdowns across Ethiopia.

Swathes of the country’s Oromia region were without phone and internet services during the first few months of 2020, as the Ethiopian army battled Oromo Liberation Army (OLA) fighters based in the area.

In late June of last year, mob violence following the murder of superstar musician Hachalu Hundessa led to hundreds of deaths and a nationwide internet shutdown that lasted 23 days and is estimated to have cost Ethiopia’s economy at least $100m.

Flatlining the internet is simple for authorities. Ethiopia’s state-run telecommunications firm Ethio Telecom is the sole telecoms provider for the country.

In 2018, when Abiy took office, the government announced it would open the state-run monopoly to private foreign investors – one of several high-profile privatisation plans announced that year.

The allure for foreign investors was undeniable. Ethiopia’s economy is among the most closed in Africa and it boasts the second-biggest population on the continent, with 110 million people.

In 2018, when Abiy Ahmed became prime minister, the Ethiopian government announced it would open state-run monopoly Ethio Telecom to private foreign investors [File: Tiksa Negeri/Reuters] But the enthusiasm that first greeted the announcement is likely to have been tempered by the government’s habit of shutting off internet and phone services whenever instability rears its head.

A frontier market superstar

Despite a history blighted by recurring wars and famine, Ethiopia had started turning a page over the past decade. A frontier market superstar, it achieved an average of just shy of 10 percent growth a year from 2008-09 to 2018-19, according to the World Bank.

Most of that growth was fuelled by construction and services. An infrastructure boom saw condominium housing projects, industrial parks, skyscrapers and Addis Ababa’s light rail system inaugurated in 2015.

Skyrocketing living costs in a country where incomes were averaging $855 per capita before the coronavirus pandemic left most Ethiopians struggling to cope, but the transformation fuelled enthusiasm, nonetheless.

People walk in a street in Addis Ababa, Ethiopia in November [File: Maheder Haileselassie/Reuters] The future looked even brighter when Abiy became prime minister in 2018. Hopes abounded that his political ascent would quell two years of political unrest and anti-government uprisings that had unseated his predecessor, Hailemariam Desalegn.

Frustrated by years of state repression, protesters had demanded change. Heavy-handed government crackdowns over the course of 2016 often ended with security forces shooting and killing scores of unarmed youth. During this period, a slew of foreign-owned businesses was attacked and set ablaze by protesters who felt these companies did little to serve their communities.

Abiy’s freeing of thousands of political prisoners and announcement of plans to liberalise the economy appeared to herald a future of rising living standards, and for foreign investors, a chance to buy into what looked like a promising growth story.

Meanwhile, Ethiopia’s unrest did not quiet when Abiy took office. In 2018, some 1.4 million Ethiopians were displaced by ethnic violence and land disputes – the highest number in any country that year, according to the International Displacement Monitoring Centre. And approximately five months after Abiy became prime minister, communal clashes in an Addis Ababa suburb left 23 dead.

But Abiy’s international credibility got a sterling boost after he cemented a peace deal with neighbouring Eritrea in 2018, ending two decades of conflict and paving the way for landlocked Ethiopia to potentially access to Eritrea’s trade-boosting ports.

In 2019, Abiy was awarded the Nobel Peace Prize.

Now, the conflict in Tigray has badly tarnished those reformist credentials.

Prime Minister Abiy Ahmed Ali was awarded the Nobel Peace Prize in 2019 [File: NTB Scanpix/Stian Lysberg Solum via Reuters]

‘Divergent scenarios’

More than two million people have been displaced by the conflict in Tigray, an Ethiopian government official recently said on state-run TV.

Fighting continues in the conflict-ravaged region. Last month, the United Nations raised the alarm over “major violations” of international law at two refugee camps in Northern Tigray. A starvation crisis looms.

Multinational corporations have pulled their staff and shuttered operations.

Chinese state-run Guancha news outlet reported that on November 13, the Welkait sugar factory, whose construction was funded by a $500m Chinese government loan in 2014, was damaged in an air raid during the Tigray conflict. The Chinese government ended up evacuating more than 600 of its citizens, including 187 of the factory’s employees.

The DBL Group, a Bangladeshi garments manufacturer, recently evacuated over a hundred foreign staff members from Ethiopia after the company’s factory in Tigray was hit by an explosion in November. It has yet to reopen its facilities there.

Whether these are harbingers of a rethink by foreign firms is unclear. Some big-name multinational firms like British retailer Diageo, Chinese garment producer Wuxi Jinmao and German automobile manufacturer Volkswagen that had gambled on Ethiopia’s sizeable and young population have stayed the course through Ethiopia’s chronic power outages, slow internet speeds and bureaucratic difficulties that have seen the country slip down the rankings of the ease of doing business global index in recent years. Dutch juice and fruit processing company Africa Juice had its project site in rural Ethiopia set ablaze by protesters in 2016, and the company pushed on with operations.

We lost everything in a single day. Birhanu Woldemeskel, Ethiopian expat, small investor

But Tigray could prompt a rethink, observers say, especially if the conflict drags on.

“The recent war in Tigray may lead to divergent scenarios depending on how things pan out over the next weeks and months,” says Biniam Bedasso, a researcher at the Collaborative Africa Budget Reform Initiative in Pretoria, South Africa. “If the uncertainty surrounding the conflict persists without some sort of resolution, business confidence, particularly FDI [foreign direct investment] may suffer significantly. Investors abhor uncertainty more than anything.”

For smaller mom-and-pop investors from the Ethiopian diaspora, the risks could prove too much.

“I would never tell someone not to invest in Ethiopia, but everyone should be aware of the risks associated with it,” Birhanu Woldemeskel, a member of the Ethiopian diaspora in Canada, told Al Jazeera.

Woldemeskel says he invested the money he saved working as a taxi driver in the refurbishing of the family business, a cafe his uncle managed in the town of Shashemene.

In July, rioters set it and hundreds of other homes and businesses ablaze, killing business owners and bystanders alike in what was one of the worst bouts of havoc the country experienced in 2020.

“Outside of Addis Ababa, there is no safety or security,” he added. “It took years of blood, sweat and tears to establish the family business. We lost everything in a single day.”

In November, the World Food Programme provided nearly two million Ethiopians with food and cash assistance [File: Mohamed Nureldin Abdallah/Reuters]

Other challenges

What two years of deteriorating instability may have spared in Ethiopia’s economy, the pandemic has scalped. Tourism and other sectors continue to reel from losses. The worst locust swarm in a generation compounded food insecurity already exacerbated by conflict and the pandemic. The International Monetary Fund forecast in October that the country’s economy would see zero growth this year. In November, the World Food Programme provided nearly two million Ethiopians with food and cash assistance.

In December, the prime minister’s office announced the formation of what it calls an independent economic council, composed of 16 individuals who will serve as advisers and share their insights on economic affairs with the government.

“The economic technocrats in Addis Ababa are betting on the ongoing reforms paying off fast enough to offset potential losses from political uncertainty,” Bedasso explains. “However, it should be noted that the liberalising measures taken by the government are less likely to move the needle on investor confidence than a strong, stable state would.”

Earlier this week, Reuters news agency reported that the Ethiopian government has extended the deadline to April for telecom firms to submit bids for an auction of telecom licences and the sale of a 45 percent stake in Ethio Telecom.

“The privatisation of Ethio Telecom to foreign firms is unlikely to contribute to a switch in the government’s tendency to shut down the internet at will,” Ayele Gelan, a research economist at the Kuwait Institute for Scientific Research, told Al Jazeera. “The current slowdown [in interest] is linked to unfavourable findings by those firms, in addition to the fact that the state enterprises are engulfed with debt.”

Whether Tigray’s internet and mobile phone service will be restored in time for the auctions is an open question.