Ethiopia's economy is growing rapidly. The International Monetary Fund (IMF) predicts that the country's real growth will reach 9.2 percent in the fiscal year 2025-26. However, renewed conflicts in the north, high reconstruction costs, and agricultural issues due to climate change pose a serious threat to the country's economic recovery.
Consequences of Renewed Conflicts
London-based financial analyst Abdulmanan Muhammad warns about the consequences of the renewed escalation of war. He states, "If the main conflict resumes, the current economic growth will not be sustainable." The war that took place between 2020 and 2022 in Tigray and other parts of Ethiopia caused extensive damage. Infrastructure was destroyed, business production capacity decreased, and some agricultural lands are no longer cultivable.
An estimate of the damages and needs resulting from the conflicts shows that the damages from several conflicts in Ethiopia from November 2020 to December 2021 exceeded $22.6 billion (€20.2 billion). Economic damages are estimated at around $6 billion, and the resources needed for reconstruction and economic recovery are estimated at about $19.7 billion. This figure refers to large-scale needs, not annual costs or damages from the current escalation.
Reconstruction and Economic Challenges
The reconstruction program, which spans from 2023 to 2028, remains shrouded in uncertainty. Can this work be fully funded and completed on time? Abdulmanan Muhammad believes that the economic consequences of the Tigray war have been even more severe than anticipated. He points to lost economic production, high inflation, and a shortage of foreign currency at that time. International trade conditions have also worsened: in 2022, Ethiopia lost its benefits under the African Growth and Opportunity Act (AGOA).
Following the Portaria peace agreement in November 2022, Ethiopia's economy began to improve. According to IMF forecasts, economic growth is expected to reach 7.2 percent in 2022-23 and 8.1 percent in 2023-24, with expectations of reaching 9.2 percent in 2024-25 and 2025-26. Agriculture, mining, and electricity generation are among the main factors driving this growth.
However, this does not mean that the country's economic problems are resolved. Reconstruction remains a significant challenge, inflation puts a lot of pressure on families, and the government must address its debts. By late 2023, Ethiopia declared bankruptcy due to a failure to pay interest on a eurobond. Reforms supported by the IMF program, which began in 2024, are intended to address structural weaknesses in the economy.
Renewed escalations in conflict could put additional pressure on public finances. The government will be forced to spend more on military personnel, equipment, and logistics. At the same time, economic activities and consequently tax revenues in affected areas may decline. Abdulmanan Muhammad warns: "A significant portion of government resources will be diverted to military expenses that would otherwise be available for infrastructure, education, and social services."
The continuation of war could lead businesses to delay their investments. Lenders and international donors may become more cautious, while the government will need additional resources for security and humanitarian aid. This situation may result in fewer resources available for development projects such as roads and energy infrastructure.
The IMF predicts that the average inflation rate will reach 11.7 percent in 2025-26. Therefore, prices will continue to rise, albeit at a slower pace than in previous years. Abdulmanan Muhammad expects that renewed escalations in conflict will intensify inflationary pressures. He states, "If conflicts escalate further, there is a likelihood of increased inflation."
Militarization also requires foreign currency for purchasing equipment from abroad. If this demand increases, there will be less foreign currency reserves available for private businesses for imports, which will put more pressure on exchange rates and increase the cost of imported goods, fuel, and industrial inputs.
The dimensions of these impacts on this BRICS member will depend on export revenues, monetary policies, and developments in international markets. Thus, a new increase in inflation is considered a risk, but it is not an inevitable outcome of escalating conflicts. The combination of rising prices and uncertain incomes could be particularly challenging for poor families.
Abdulmanan Muhammad identifies agriculture as well as the tourism and hospitality sectors as highly vulnerable sectors, stating, "Agriculture is particularly at risk because many conflicts occur in rural areas where farmers work." Insecurity around agricultural lands, disruptions in transportation routes, and shortages of agricultural inputs can weaken production. At the same time, some regions of the country suffer from a lack of rainfall and poor harvest forecasts.
The tourism industry is also severely affected by security risks. Travel warnings and reports of conflicts can deter visitors and reduce the income of hotels and tour operators. In making investment decisions, international investors consider not only the market size but also political stability, security, and the reliability of government institutions. Therefore, renewed escalations in conflict could delay investment decisions.
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