Recent developments in Ethiopia indicate that prime minister Abiy Ahmed plans to reform the country. His rapprochement towards Eritrea was unexpected and could mark a turning point in Eritrea’s international isolation. Nevertheless, Ethiopia’s  economic situation – marked by foreign exchange shortages and high external debt levels – remains difficult and the fast pace of the recent reforms risks creating opposition. For Eritrea, the current developments are significant and are likely to reduce the country’s international isolation, but nevertheless no significant political and economic reforms are expected in the short term.

Impact on country risk

Ethiopia’s prime minister was appointed in March 2018 following the resignation of Hailemarian Desalegn due to the strong anti-government protests that began already in 2015. Abiy Ahmed belongs to the Oromia ethnical group. This group together with the Amhara people are the largest ethnical groups in Ethiopia. They have been the drivers behind the unprecedented protests that rocked the country. Up to then, the prime minister had always come from the Tigrayan ethnical group. While this group represents only 6% of the population they used to form the economic and political elite. Since the appointment of Abiy Ahmed, the Tigrayan and their Tigray People Liberation Front have been losing influence.

With the appointment of Abiy Ahmed a new wind is blowing through Addis Ababa. In contrast to the state-led growth model that Ethiopia has been following in the past, Abiy Ahmed is a proponent of a larger role for the private sector. He plans for example to privatise a series of state companies, such as Ethiopian Airlines and to reform the Military and Engineering Corporation, a company that is under the control of the military and has been a major beneficiary of government contracts.

Abiy Ahmed also advocates the freeing up of political space. During his inauguration speech, he apologised for the police violence that led to the death of hundreds of protesters. Additionally, he freed thousands of political prisoners and lifted the state of emergency.

His most blunt policy change was however the unexpected rapprochement towards Eritrea. The two countries had not implemented the peace treaty that was signed after the 1998-2000 war. However, after Mr Abiy and the Eritrean president’s meeting in Asmara, an agreement was made to restore diplomatic relations, to resume flights between the two capitals and to reopen the border posts. Moreover, the Ethiopian prime minister agreed to implement the peace agreement that was signed in 2000 but not implemented given that the Ethiopian government resisted ceding contested territory and complying with an international ruling in 2002.

For Eritrea, the recent peace treaty could thus mark a turning point in its international isolation. The country became independent from Ethiopia in 1991 and has been ruled by president Issaias Afwerki since 1993. He and his extended family tightly control the country’s politics and economy. The territorial dispute with Ethiopia and the absence of an implemented peace treaty have always been used by the president to justify the militarisation of Eritrea. A large part of the population of Eritrea has been forced into  lifelong military service and the dispute with Ethiopia has always been the main reason for the continued imposition of the state of emergency. Internationally, the country was isolated because of human right violations and UN sanctions have been in place since 2009 because of Eritrea’s support for the Al-Shabaab militia in Somalia.

Now, a removal of the UN sanctions against Eritrea becomes more likely. Ethiopia has launched a request to rewind the sanctions and the UN Secretary-General Antonio Guterres declared that the sanctions might become obsolete after the deal.

In Eritrea, this opening up of the country could lead to foreign investors’ interest, particularly in developing the country’s telecommunication sector, mining sector and tourism potential. However, this will not be easy to achieve given the difficult political and economic situation. Currently, the country has virtually no private sector, and the only active foreign investments concern two mining projects. This difficult environment is also reflected in Credendo’s expropriation risk which remains firmly set in category 7. Credendo’s short- term and medium-term political risk classifications are also firmly set in category 7.

Some unconfirmed reports stated that Eritrea’s president introduced  measures that would slightly increase political and social freedom. However, it is unlikely that the ruling president would implement any bold measures to improve human rights situation and reform the economic and political situation. It remains to be seen how Afwerki’s policy will evolve now that one of the main reasons for the militarisation of Eritrea and the restriction of political freedom has disappeared.

In the case of Ethiopia, the recent developments are really significant. Prime minister’s decision to end the state of emergency, to privatise a number of state assets and to establish a rapprochement towards Eritrea are measures that were all considered unthinkable a few months ago.

In the long term, landlocked Ethiopia is likely to benefit from the détente with Eritrea as it will give access to a number of trading routes and ease the access to international markets through Eritrean sea ports.
Nevertheless, Abiy Ahmed’s policies are subject to numerous risks. First of all, both his political and economic reforms face opposition from parties with vested interests and hardliners. A number of fractions (especially among the Tigray People Liberation Front) are opposed to political change, such as the rapprochement towards Eritrea and the decision to cede the disputed territory. Additionally, some economic actors oppose the economic reforms because they are likely to have lost out. Such opposition could lead to an increased instability in the country.

Secondly, an additional worry comes from the fact that economic reforms will take time while the economic situation remains difficult and the country continues to struggle with foreign exchange shortages and high external debt levels. This precarious position is unlikely to change soon and continues to put pressure on the country’s short-term and medium- to long-term political risk classifications which are currently in category 6.

Analyst: Jan-Pieter Laleman – jp.laleman@credendo.com