ETHIOPIA AT A GLANCE: IMMINENT THREAT OF ECONOMIC COLLAPSE AND GENOCIDE IN ETHIOPIA

 Yonas Biru and Abu Girma

June 15 2024

Ethiopia

“Key macroeconomic parameters are in the danger zone… External financing, especially, Official Development Assistance, has dropped off the cliff … and the nation’s fiscal space has essentially disappeared” (2023)

Ethiopian Working Paper Series, the UNDP

“Thanks to Prime Minister Abiy Ahmed’s economic incompetence, Ethiopia’s economic death spiral just keeps spinning” (April 30, 2024)

Steve H. Hanke, Professor, John Hopkins University

“The political instability and conflict in different parts of the country also harmed the performance and viability of many firms by constraining mobility, depressing demand, stoking uncertainty, and disrupting supply chains.” (2023)

The Bule Book, First Consult

“The United Nations warns of heightened risk of genocide and atrocity crimes in Ethiopia” (October 10, 2023)

United Nations News – Global Perspective Human Stories

“Ethiopia is facing a possible genocide … The Amhara are in a perilous discursive position that could easily devolve into genocide” (April 24, 2023)

The Lemkin Institute for Genocide Prevention

US Travel Advice Indicates Violence and Conflicts are Growing.

UNICEF Report Shows Investment in Agriculture, Health, Education, and Infrastructure are Decreasing Imminent Threat of Economic Collapse and Genocide in Ethiopia

Yonas Biru1 and Abu Girma2

El País, a Spanish-language daily was right when it headlined on the front page of its international news that “Ethiopia’s forgotten war [between the federal government and Tigrayan rebel forces] is the deadliest of the 21st century.”

The ceasefire that was signed on November 2, 2022 in Pretoria may have silenced the guns in Tigray, but new war fronts have since been opened in the Oromo and Amhara regions. The two regions represent 61% of the nation’s total population and account for 88% of the cultivable crop area and 87.8 percent of food crop production.

If the raging civil wars in the two regions get out of hand, the consequences would be far worse in scale and impact than the two-year war in Tigray that spilled over to Amhara and Afar. The international community cannot ignore the sirens of heightened risk of genocide by the United Nations, and The Lemkin Institute for Genocide Prevention. The nation with an estimated population size of 128 million people is one spark away from a genocidal civil war. This will have calamitous impact on the geostrategic Horn of Africa through which up to 15 % of the global trade and 40% of the goods traded between Europe and Asia pass.

Enough has been written about the political crisis. What has not gotten due attention is spiraling the nation into the abyss. It is on this issue that this article focuses.

This is a two-part article. The purpose of part one is three-fold. First, it provides an under-the-hood synopsis of the economy to show headline economic data that the government publishes and the nation’s economic reality on the ground are totally inconsistent. Second, it brings to light that the government willfully misrepresents the nation’s headline economic data to conceal a festering economic crisis. Third, it provides an exposé that International Financial Institutions (IFS) such as the World Bank and IMF are complacent if not culpable in legitimizing the government’s demonstrably false and mathematically untenable data. It contrasts the World Bank’s and IMF’s optimistic economic outlook against the UNDP’s and UNCIEF’s pessimistic scenario.

Part two of the article, which will be released separately, will focus on the root causes of the crisis, and provide recommendations on the way forward.

1Yonas Biru (PhD) was the interim chair of Prime Minister Abiy Ahmed’s Economic Advisory Council. He was formerly Deputy Global Manager of the International Economic Comparison Program at the World Bank and Senior advisor to the African Development

• Abu Girma (PhD) is Associate Professor of Economics at the Institute of International Public Policy, University of Tsukuba. He was formerly Vice President of the Ethiopian Economic Association.

1. A Deteriorating Economy: An Under-The-Hood Examination

Gross domestic product (GDP) is the most referred headline economic indicator that represents the value of all goods and services a country produces in a year. Real GDP growth tracks the health of a country’s economy. It is used to determine whether an economy is experiencing a boom or bust.

Ethiopia’s real GDP growth for 2023 significantly varies depending on the source of the data. The Ethiopian government and the World Bank put it at 7.2%. The IMF shows a lower estimate of 6.1%, while the African Development Bank provides a projected estimate of 5.8%. On the lower end, the UNDP reports independent estimates that are as low as 4.5%.

We get under-the-hood of the economy to get a closer look at its primary components and check if they are consistent with any of the noted GDP growth rates. Our focus will be on agriculture, industry (including the construction and manufacturing sub-sectors), government expenditures, services, small and medium enterprises, and exports. The question we pursue is: Do the primary components add up and validate the government’s headline figures or fall short? Our discussion will be limited to 2022 and 2023 because 2024 results are not available.

I.1. Agriculture

As reported by UN-OCHA, in 2023, farmers had to leave large swaths of cultivated lands to waste without planting seeds for two reasons: Insecurity and violence in Oromo and Amhara regions and reduced access to fertilizers and seeds. A 2023 US report took note: “In 2022, Ethiopian Agricultural Trading Corporation, the state-owned enterprise responsible for purchasing fertilizer, failed to purchase enough fertilizer for the 2023 planting season, importing 11% less than the previous year and 30% less than the expected demand” The report predicted this would “decrease crop yield by as much as 20% and lead to a substantial reduction in export earnings.” The prediction proved right.

I.2. Industrial Sector: Construction and Manufacturing

On the industrial sector, construction represents a lion’s share. The construction sub-sector depends on foreign inputs and big projects undertaken by Chinese construction companies. Major construction projects were halted in 2023 due largely to foreign exchange crunch.

Of the dozen cement factories, only 4 or 5 are operating and their delivery is late, owing to security problems. As reported by the Guardian, in October 2023, “several Chinese citizens working for a cement factory were abducted in the Oromo region. In 2022 gunmen kidnapped 20 workers at another cement factory owned by Nigerian billionaire Aliko Dangote.”

According to a 2024 UNICEF report, the shares that the government allocated to capital expenditure (money spent on long term development projects such as roads and bridges) is the lowest in a decade.

Data reported by Cepheus Capital, Ethiopia’s largest private equity firm, shows in 2021 government capital expenditure was 10.5 % of GDP. In 2023 it was down to 3.3%.

The problems in the manufacturing sector are even worse. A 2022 Harvard study show the chronic forex shortage was harming manufacturing firms that need imported inputs. This was confirmed by the Minister of Industry of Ethiopia Melaku Alebel who acknowledged 446 manufacturing outlets were forced to close shop.

The situation was more serious in the 2023 fiscal year. Foreign exchange reserves were less than USD 1 billion, enough to finance less than 2 weeks of imports. As a result, the manufacturing sector suffered a 23% decrease compared to the previous fiscal year owing to shortage of raw materials due to foreign exchange shortage. In 2023, the industry sector was functioning at 45% capacity.

I.3. Government Expenditure

Government expenditure is a significant part of the economy for several reasons. First, poverty alleviation programs depend on government expenditure on pro-poor programs, Second, regions rely on budgetary support from the federal government. Third, major infrastructure projects such as roads, bridges and dams are financed by the federal government.

According to the UNICEF, “total approved federal budget for 2023 is Ethiopian Birr (ETB) 801.7 billion. It shows a 1.9 per cent increase from 2022. However, in real terms the budget has declined by 17.8 per cent due to high inflation.” According to UNICEF, Government expenditure on pro-poor programs has declined sharply. The UNDP’s report is more pessimistic, heralding “Key macro parameters are in the danger zone… External financing, especially, ODA, has dropped off the cliff … and the nation’s fiscal space has essentially disappeared.”

Cepheus capital’s report shares the UNDP’s pessimist assessment. The federal government’s subsidy to regions in 2021 accounted for 6.8% of GDP. In 2022, it was down to 2.8%. In 2023, it went further down to 1.8%. Making matters worse, regional governments’ tax base has shrunk. The Deputy Head of the Amhara Regional Bureau is on the record lamenting the region’s tax revenue over the last ten months was less than 50% the target collection.

I.4. Services

The service sector constitutes the tourism sector, transport, communications, hotels and restaurants, wholesale and retail activities, public administration, and defense, among other things.

The tourism sector is decimated because of conflicts in the Amhara and Tigray regions – the two top tourist attraction locations because of the Rock-Hewn Churches of Lalibela and the Obelisk of Axum.

Hotels outside of Addis Ababa are practically empty because of sharply reduced movement of people owing to the breakdown of law and order. Similarly, restaurants are struggling because food products are the most affected by high inflation.

Transportation is negatively affected by inflation and foreign exchange shortage whose combined impact make fuel and spare parts increasingly inaccessible. Furthermore, truck drivers and cross-country bus drivers are targets of kidnapping in the middle of nowhere. They are often held up for days until their companies or families mobilize enough resources to pay ransom. As the Guardian reported in January 2024, “the road linking Addis Ababa to Djibouti’s port, Ethiopia’s main trade artery, has become a kidnapping hotspot in the past 18 months.”

Health and education are deteriorating at an alarming rate. A 2022 report published by National Library of Medicine painted a grim picture of a collapsing health system in Northern Ethiopia that has “greatly affected the community’s health through the breakdown of the health system and health-supporting structures.” The problem is not confined to Northern Ethiopia. A 2023 report by the International Committee of the Red Cross found a similarly grim reality in the Oromo region. “In Begi, a district of 100,000 inhabitants, nearly all 42 existing health posts have been looted or damaged.”

The education sector is no different. The federal government’s budget for education has declined from 21.1% of the government’s budget in 2019 to 9.7% in 2023 and Nearly 33% of Ethiopian students are out of school.

The only thing in the service sector that is growing at a significant pace is defense spending and its destructive impact on the human and capital resources of the country.

I.5. Small and Medium Enterprises

Although the government claims small and medium enterprises (SMEs) are the engine of the 7.2% GDP growth, a report by First Consult (an independent consulting firm) notes “More than two-thirds (70%) of firms have no intention of hiring additional personnel.”

The report indicates part of the problem is lack of access to finance due partly to difficulty to meet collateral requirements, and liquidity constraints in the formal banking sector and microfinance institutions. It went on to state: “Beyond the shortage of loanable funds, the distribution of outstanding loans is concentrated around commercial bank clients i.e., 94% of the total outstanding loans go to 6% of the total number of borrowers.” SMEs are not in the picture.

The report provided a taste of the sentiment of owners and managers of SMEs. One owner stated “Last year was incredibly hard. With the costs of materials skyrocketing and the market being so unstable, it’s getting harder to see a bright future. I’m seriously thinking about whether it’s worth continuing or if I should just cut my losses and move on.”

Another said “Running a bakery these days feels like a daily battle, especially with the input shortages and having to close early for safety. But we’re pushing through, focusing on keeping our doors open and serving our community as best as we can.”

I.6. Export Earnings

Export revenue, one of the critical parts of the economy, is in the decline. Overall, the foreign exchange earning of the commodity export sector has been weak and deteriorating and as of 2023, Ethiopia’s export earning was $3.6 billion. This was 44% below the government’s target for the year and 12% less than the 2022 export revenue.

1. A Policy of Veiling the Economic Crisis with Rosy Data

While the core sectors of the economy are saddled with chronic problems, the government in power is busy painting a rosy picture regarding the state and performance of the economy. As noted by the Economist magazine, autocratic governments with no accountability or institutional restraints lie about economic data.

The Ethiopian Prime Minister has taken misrepresenting economic data to a new level. In 2023, he summarily dismissed the Director General of the Central Statistical Agency (Biratu Yigezu) after he refused to publish false data on the so-called bumper wheat harvest. Yigezu’s replacement (Beker Shale) whose linked in profile shows no prior experience in national statistical work publishes whatever data the Prime Minister’s office or heads of line ministers concoct.

The headline data that the government rattles out are often demonstrably false, and at times mathematically untenable. We provide below three concrete examples of brazen data fabrication, including the green legacy initiative, wheat production, and inflation figures.

II.1. The Green Legacy Initiative

The Green Legacy is Prime Minister Abiy’s flagship initiative to plant 50 billion trees in two phases. But the government’s claim that it has “successfully planted 32.5 billion seedlings in the first phase and the first year of the second phase” is too far detached from reality.

On July 20, 2019, Getahun Mekuria, minister of innovation and technology announced Ethiopia planted 353,633,660 tree seedlings in just 12 hours. Further, Tefera Mengistu, the National Forest Sector Development Program coordinator, announced more than 23 million people took part.

No country has come remotely close to such a feat. Despite Ethiopia’s claim of “record-shattering” achievement, India’s 2017 record for planting 66.3 million trees in a day with 1.5 million volunteers remains the world record. Ethiopia has not taken over the record because it could not get its claim verified by Guinness World Records.

Some anecdotal information throws a wet blanket over the government’s 353.6 million “record breaking” claim. For example, the BBC reported that its reporters were told by a government affiliated organization that “they’d been ordered to plant 10,000 trees but had to pay for them out of their own budget, So, they planted 5,000 but reported the full amount.”

II.2. Wheat Production and Achieving Food Security

Self-sufficiency in wheat production is the Prime Minister’s another signature project with a dual objective of achieving food security and stopping disease transmission that he associated with international food aid, according to the BBC.

Echoing the Prime Minister’s self-sufficiency claims. a 2022 paper produced by government researchers lauded the government’s “achievement” as a paradigm breaker and predicted Ethiopia can replicate Asia’s Green Revolution by 2023. The paper stated:

With a total of 2.6 million hectare of land cultivated under both rain-fed and irrigated systems, followed by a record amount of wheat harvest (8.2 million tons) in 2022, Ethiopia achieved a wheat self-sufficiency ratio of 100% and more than 1 million tons of surplus for export, indicating that the new irrigated wheat initiative of Ethiopia has been found transformational and is becoming a game changer.

To the contrary, the US Department of Agriculture (USDA) estimated Ethiopia’s wheat production for the marketing year 2023 at 5.5 million metric tons. The report estimated production to be the same as the previous two years and below the 5-year average. Mathematically, this means over the last five years production has decreased.

The USDA further reported “Satellite imagery analysis by USDA’s Foreign Agricultural Service and several other researchers indicated that irrigated wheat area did not increase by two million hectares as claimed by Ethiopia’s Ministry of Agriculture.” This is consistent with an official statement delivered by Dr. Dagnachew Fentaw, Amhara regions development bureau, who revealed that “of the 214 irrigation projects planned for the year, only 92 were started and of those only 30 were completed.”

II.3. Inflation

In 2018, just before Prime Minister Abiy took office, inflation rate in Ethiopia was 7.2%. Since then, the inflation rate has accelerated rapidly and hit a high of 33.7 percent in December 2022. Even if there is a marginal moderation for 2023 at 32.6 percent, the overall inflation momentum is still strong. Its impact is widespread, affecting most of the food and non-food consumption items in the market.

The level of the Consumer Price Index (CPI) – with December 2016 as a base period – has increased to 406.9 as of March 2024, indicating a four-fold increase in overall price levels relative to the base period. Such a rapid rise in price levels puts the country as one of the worst inflation prone economies in the world. The impact of such corrosive level of inflation on the welfare of the public is apparent especially taking into consideration a very modest, if any, rise in the average income and wealth level of households.

Moreover, the current relative weights in the consumption basket of consumers do not reflect the allocation behavior of increasingly budget constrained households which makes the index to be systematically biased against expenditures on food and other basic items. This in turn underestimates the inflation rate because the CPI fails to accurately capture the extent to which vital consumption items exhibit rapid rise in prices.

In 2023, the Ethiopian government announced expected inflation rate to fall by the end of June 2024 to 23.3 percent. The government report also shows food inflation has dropped from 31.8% to 27.0%. Food constitutes by far the largest weight in Ethiopia’s inflation calculation, accounting for 53.5%. Together, housing, energy, and construction material constitute about 20%. For the 23.3% overall inflation figure to be feasible, prices of housing, energy and construction material and other items should exhibit sharp moderation in the inflation computation basket. However, this is not the case. Despite desperate ad hoc measures to administratively control rental cost and fuel prices, the prices of such non-food items are not showing upward pressure.

Steve Hanke, Professor, founder, and co-director of the Institute for Applied Economics at Johns Hopkins University estimated inflation in Ethiopia currently runs at a staggering 65% per annum. Ethiopian economists have registered it in the range of 40% to 50%.

III. World Bank and IMF: Legitimizing False Data

It is important to note that neither the World Bank nor the IMF directly gather primary macroeconomic or sectoral data in Ethiopia or anywhere else. It means, they rely on reporting governments on such vital data. However, both have country offices in Ethiopia and closely know the state of the economy. It is a unfortunate that both The World Bank and the IMF peddle the government’s false narrative and validate what they know to be or should know to be false data.

Shermichel Singleton, an American political analyst, rightly described the World Bank as “the world’s longest running ‘Go Fund Me’ enterprise.” Its function, he said, is mobilizing resources from rich countries to help fund development programs in poor countries. The same is true with the IMF.

Neither the World Bank nor the IMF function as a traditional bank or financial institution. Just like the go-fund-me enterprise, they are driven by maximizing the resources they mobilize and transfer.

In January 2018, the World Bank Senior VP and Chief Economist, Paul Romer, publicly accused the institution of cooking country level data for political reasons. He wrote: “I’ve never in my professional life encountered professional economists who say so many things that are easy to check and turn out not to be true.” He was forced to resign. In the same year, he won the 2018 Nobel Prize in Economics.

Romer’s case led the US government to demand an independent investigation. In 2021, the Bank’s independent Auditor General issued his finding. The conclusion was “Out of the 15 staff interviewed, 9 indicated that they had been directly or indirectly pressured to manipulate data.”

1. Concluding Remarks

No matter how one slice and dices the primary GDP components, they do not compute the headline figures that the government publishes. Our under-the-hood look shows the GDP growth data the government publishes are demonstrably inconsistent the economic reality under the hood. Simply put, the components of the headline economic data do not compute.

The closest analogy that comes to mind is a house whose foundation is being devoured by termites, while the naïve homeowner is preoccupied with painting its roof and the exterior walls for a show-and-tell. It is this paradox of misguided priority that continues to expose the economy to recurrent shocks and rapid disintegration of the national economic landscape.

The rosy GDP growth rate that the Ethiopian government touts and the World Bank and IMF echoe is nothing short of a cross between basking in a wishful thinking and marketing deceit. The notable difference between the optimistic economic outlook that the World Bank and IMF narrate and the pessimistic scenario that the UN agencies such as the UNDP and UNICEF publish raises a red flag.

According to the IMF, Ethiopia’s growth rates over the last five years are: 9.0% (2019), 6.1% (2020), 6.3% (2021), 6.4% (2022) and 7.2% (2023), and 6.2% (2024). How does an economy with such supposedly robust growth performance still exhibits youth unemployment rate of 27.2 percent in urban areas? An economy that registers such a robust growth can mobilize significant fiscal and investment resources from the growing pie of the economy. The fact is that, since 2018, the federal government’s tax revenue has been sharply decreasing and fiscal deficit has been increasing. In 2023, tax revenue collection was at its low of about 6% of GDP significantly below its historic high ratio of 15% in 2016.

The World Bank’s and IMF’s reproduction of the government’s false data has severe consequences. First and foremost, they give the government’s rosy data credence and lulls the international community into inaction or spur it to the wrong action. In doing so, they allow the crisis to fester beyond remedy. This will have existential consequences not only on Ethiopia, but also on the geostrategic greater Horn of Africa.

Apart from sugarcoating the state of the increasingly worsening economy, the fabricated data and its false portrayal of a stable and growing economy allows the government to acquire loans to finance its destructive war endeavor.

The government has been acquiring Chinese-built 155 mm SH15 wheeled, self-propelled howitzers, according to The Defense Post and Military Africa. The international media is replete with stories of indiscriminate killings of civilians by drones with such titles as “‘Horrific’ civilian toll as Ethiopia turns to combat drones to quell local insurgencies” (The New Humanitarian); “Collective punishment’: Ethiopia drone strikes target civilians in Amhara” (Aljazeera); “Aerial strike on Ethiopia church grounds kills eight” (Reuters); and “Witnesses: Drone strikes in Ethiopia’s Oromia kill civilians” (AP News).

The government made its priority clear when it awarded Ethiopia’s Medal of Honor to the CEO of Turkish drone manufacturer, Baykar, praising the significant role his drones played in Ethiopia’s civil war. In the same week, the Ethiopian Field Marshal vowed to step up the drone operation. Days later, he made good of his words with intensified drone attacks. This is the same government that is currently in negotiation with the IMF and the World Bank for multi-billion loans from each institution.

The international community needs to be reminded of the World Bank’s and IMF’s complacency in financing the architects of the Rwanda genocide. There are reports detailing the Rwandan government was using World Bank loans to increase its military expenditure by three-fold between 1990 and 1992. The World Bank and the IMF stopped funding the government in 1993, but it was too late.

The situation in Ethiopia is rapidly diving into full scale crisis and a coordinated and bold effort should be made in time to avert an economic collapse and an impending risk of genocide. This requires an active and assertive role of the international community and global powers to exert pressure on the government to: (1) declare a unilateral ceasefire in the Amhara and Oromo regions,

• stop the Prime Minister’s vanity projects that are sucking up the nation’s meager resources, (3) establish an independent commission to investigate the nation’s state of the economy, and (4) set up an international human rights violation investigation and establish a transparent mechanism to hold those responsible accountable.

The international community must use all the arsenals in its possession before the crisis reaches a point of no return. Such actions must include economic sanction, arms embargo along with sanction against countries that are arming the Ethiopian government and initiating an international legal procedure to hold the Prime Minister, the Field Marshal, and others who are involved in human rights violations and war crimes.