The conflict compounds operating challenges including FOREX shortages and rising inflation
Most MNCs operating in Addis Ababa will not be directly affected by hostilities or famine conditions for the foreseeable future. Few MNCs are expected to divest their operations, but most companies will halt investment plans until the outcome of the conflict becomes clearer. The slowing of the government’s economic liberalization plans will further stifle new B2B opportunities. MNCs should closely monitor political and security developments and ensure contingency plans are ready to deploy. MNCs should also review their market assumptions and growth goals and provide support to local partners facing rising inflation and chronic FOREX shortages.
Overview
On March 24, 2022, the Ethiopian government declared an “indefinite” and “unilateral” truce in the Tigray conflict. The announcement followed nearly 18 months of hostilities between insurgents led by the Tigrayan People’s Liberation Front (TPLF) party that has cost an estimated 300,000 lives and created famine conditions for six million people. Meanwhile, the suspension of budgetary support and the tightening of sanctions by the US, UK, and EU, and the collapse in private sector FDI in response to the conflict have aggravated economic headwinds. Trends of fiscal pressure, rising inflation, and chronic FOREX shortages predate the conflict.
Our View
The outcome to the conflict is highly uncertain, and there is no guarantee that the truce declared in March will give way to lasting peace. The negotiating positions of the federal government (to exert more control over Ethiopia’s regions) sharply contrast with the ethnonationalist-driven goals of greater autonomy that are sought by the TPLF and shared by other regions. The fluid and nebulous nature of anti-government rebel alliances and the federal government’s thinly spread military resources mean the truce could easily be thwarted by unilateral armed action by any of the country’s myriad of rebel groups. Therefore, a plausible outcome is a protracted conflict for the remainder of 2022 that sees renewed hostilities between government troops and rebels, featuring either a stalemate or swings in territorial gains over the coming year, and which is punctuated by renewed truces to provide humanitarian relief. The economy will continue to grow in 2022 thanks to government investment and growth in export revenues, but chronic FOREX shortages will worsen, and inflation will likely accelerate.
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