Will renewed conflict derail Ethiopia's economic growth?

The immediate threat is renewed conflict in northern Ethiopia, especially around Tigray. Fighting there could weaken the economic recovery that began after the Pretoria peace agreement in November 2022. The risk matters because Ethiopia is growing quickly, but its recovery remains fragile and reconstruction is unfinished.

The 2020–2022 war affected Tigray and other parts of Ethiopia. It destroyed infrastructure, reduced business production and left some agricultural land uncultivated. A World Bank-backed assessment recorded more than $22.6 billion in damage from several conflicts between November 2020 and December 2021.

The article does not identify every area affected by the current escalation. It warns that a major or prolonged conflict could raise military and humanitarian spending, reduce tax revenues and delay investment. That would leave fewer resources for reconstruction and development across Ethiopia.

Ethiopia’s economy is expanding rapidly. The IMF reports growth of 7.2% in 2022–23 and 8.1% in 2023–24. It estimates 9.2% growth in 2024–25 and forecasts another 9.2% in 2025–26. Agriculture, mining and electricity generation are important drivers.

That growth exists alongside huge losses from earlier conflicts. A World Bank-backed assessment found more than $22.6 billion in damage between November 2020 and December 2021. Economic losses were about $6 billion. The estimated reconstruction and recovery bill is approximately $19.7 billion.

The $19.7 billion figure is the total funding needed, not an annual cost. It also does not include damage from the current escalation. A reconstruction plan covers 2023 to 2028, but it remains uncertain whether the work can be fully funded and completed.

The 2020–2022 Tigray war caused damage far beyond the battlefield. Infrastructure was destroyed, businesses lost production capacity and agricultural land could not be cultivated in some areas. These effects reduced economic activity and created a large reconstruction burden.

The war also caused wider financial stress. Abdulmenan Mohammed points to lost economic output, high inflation and foreign-currency shortages. International trade worsened too. In 2022, Ethiopia lost benefits under the US African Growth and Opportunity Act, or AGOA, which had allowed certain African exports to enter the US market duty-free.

The damage assessment shows the scale of the legacy. Several conflicts caused more than $22.6 billion in damage between November 2020 and December 2021, with about $6 billion in economic losses. Recovery therefore requires rebuilding infrastructure, restoring production and repairing public finances.

Gross domestic product, or GDP, measures the total economic output of a country. It combines activity across many sectors and regions. This makes it a broad measure of national performance, but it does not show whether every area or household is benefiting equally.

Ethiopia illustrates this difference. The IMF reports strong national growth, driven partly by agriculture, mining and electricity generation. If these sectors expand in areas outside the conflict zones, their gains can outweigh falling production in regions affected by violence. National GDP can therefore rise while local economies struggle.

This does not erase the war’s damage. Conflict-affected regions may still need reconstruction, restored businesses and usable farmland. Ethiopia also faces inflation, debt service and unfinished recovery work. High GDP growth is therefore compatible with serious regional hardship and continuing economic risks.

A renewed conflict would increase the government’s immediate security costs. Military personnel, equipment and logistics require funding. The government might also need more money for humanitarian assistance. These demands would compete directly with development priorities such as infrastructure, education and social services.

The pressure could work in two directions. Spending on the military would rise, while economic activity in affected regions could fall. Lower activity would reduce tax revenues. A prolonged war might also make international lenders and donors more cautious, limiting funds available for roads, energy infrastructure and other projects.

The final effect would depend on the conflict’s scale and duration. A short escalation might create pressure without completely redirecting the budget. A major, prolonged war could tie up a substantial share of government resources and delay reconstruction, investment and public services.

Renewed fighting could intensify inflation through both domestic and foreign-currency pressures. To pay for additional security spending, the government might borrow more inside Ethiopia. This could make credit harder for private businesses to obtain, limiting investment and adding pressure to prices.

The military would also need foreign currency to buy equipment abroad. If military demand increases, fewer foreign-exchange reserves may be available for businesses importing goods and production inputs. Greater demand for foreign currency can put pressure on the birr exchange rate. A weaker birr makes imported items cost more in local currency.

The likely result would be higher prices for imported goods, fuel and industrial inputs. Food prices could also rise if imports become more expensive or supplies are disrupted. The scale would depend on exports, monetary policy and international market conditions.

Foreign currency lets a country pay for goods bought from abroad. Ethiopian businesses need it for imports, including industrial inputs, while the military needs it for equipment. The available supply depends partly on foreign-exchange reserves and export earnings. Demand and supply therefore affect the birr’s value.

A new conflict could increase government and military demand for foreign currency. If reserves are used for equipment, fewer dollars or other foreign currencies may remain for private companies. Businesses could then face difficulty importing fuel, machinery, materials or other inputs. A weaker birr would make each import more expensive in local currency.

These pressures can disrupt production and raise prices at the same time. The article identifies export earnings, monetary policy and international markets as factors that could change the outcome. Sustained shortages would make it harder for businesses to operate and invest.