Ethiopia's economic recovery hangs in the balance as fighting threatens to return

Ethiopia's economic recovery hangs in the balance as fighting threatens to return

Renewed fighting in northern Ethiopia, mounting reconstruction costs and rising inflation threaten to undermine the country's strong economic growth and derail its recovery.

Ethiopia is recording impressive economic growth, but renewed fighting in the country's north threatens to undermine its recovery, derail development plans and deepen financial pressures on millions of people.

The International Monetary Fund (IMF) forecasts real economic growth of 9.2 per cent for the 2025–26 fiscal year. However, renewed conflict, mounting reconstruction costs and climate-related agricultural challenges could threaten the country's economic progress.

London-based financial analyst Abdulmenan Mohammed has warned that further escalation could reverse the gains made since the end of the Tigray war.

"If there is a major conflict [...] the current economic growth will not be sustainable," he told DW.

The costly legacy of the Tigray war

The war that engulfed Tigray and other parts of Ethiopia between 2020 and 2022 caused widespread destruction, crippling infrastructure, reducing businesses' production capacity and leaving agricultural land uncultivated in some areas.

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A World Bank-backed damage and needs assessment estimates that several conflicts in Ethiopia between November 2020 and December 2021 caused more than $22.6 billion (€20.2 billion) in damage. Economic losses amounted to approximately $6 billion.

The estimated cost of reconstruction and economic recovery stands at about $19.7 billion. This figure represents the total funding required, not annual expenditure or damage resulting from the latest escalation.

Ethiopia's PM Abiy Ahmed visits an industrial park in Hawassa, the capital of the Sidama region, in August 2025. (Photo: Ethiopian Prime Minister's Office)

A reconstruction plan covering 2023 to 2028 was subsequently developed. However, it remains uncertain whether the government will secure sufficient funding to complete the work within the planned timeframe.

Financial analyst Abdulmenan Mohammed believes the economic consequences of the Tigray war were even more severe. Beyond the physical destruction, he points to lost economic output, high inflation and foreign currency shortages during the conflict.

Ethiopia also faced deteriorating international trade conditions. In 2022, the country lost its benefits under the United States' African Growth and Opportunity Act (AGOA), which had allowed certain African exports to enter the US market duty-free.

Economic growth continues despite the crisis

Following the signing of the Pretoria peace agreement in November 2022, Ethiopia's economy began to recover.

According to the IMF, the economy expanded by 7.2 per cent in the 2022–23 fiscal year and 8.1 per cent in 2023–24. The organisation puts growth at 9.2 per cent for 2024–25 and forecasts another 9.2 per cent for 2025–26.

Agriculture, mining and electricity generation are among the key drivers of this expansion.

The strong growth figures do not necessarily contradict the economic damage caused by the war. Gross domestic product (GDP), which measures a country's total economic output, can continue rising even when particular regions are struggling.

This happens when major economic sectors outside conflict-affected areas continue expanding, offsetting some of the losses in regions experiencing violence.

However, impressive growth figures do not mean Ethiopia's economic challenges have been resolved. Reconstruction remains a major financial burden, inflation continues to squeeze households and the government faces mounting debt obligations.

In late 2023, Ethiopia defaulted after missing an interest payment on a Eurobond. Economic reforms supported by an IMF programme launched in 2024 are intended to address longstanding structural weaknesses.

More military spending could undermine development

A renewed escalation of the conflict could place additional pressure on government finances, forcing authorities to spend more on military personnel, equipment and logistics.

At the same time, economic activity in affected regions could decline, reducing business operations and government tax revenues.

"A substantial share of government resources would be tied up in military spending that would otherwise be available for infrastructure, education and social services," warned Abdulmenan Mohammed.

The scale of the economic impact would depend on how extensive and prolonged any renewed fighting becomes.

Around 750,000 people in Ethiopia remain internally displaced as a result of the Tigray conflict. (Photo: Privat)

A prolonged conflict could also discourage businesses from investing as uncertainty increases. International lenders and development partners might become more cautious, while the government would face additional demands for security and humanitarian assistance.

This could leave fewer resources for development projects, including roads, energy infrastructure and other essential services.

Inflation and foreign currency shortages

The IMF forecasts an average inflation rate of 11.7 per cent for the 2025–26 fiscal year, meaning prices are expected to keep rising, although at a slower pace than in previous years.

Abdulmenan Mohammed warns that renewed fighting could intensify inflationary pressures.

"If the conflict escalates further, inflation is likely to rise," he said.

To finance increased military expenditure, the government could resort to additional domestic borrowing. This could crowd out private businesses by making credit more expensive or limiting their access to financing for investments.

The military also requires foreign currency to purchase equipment from abroad. Increased demand could reduce the foreign exchange available to private businesses importing goods and industrial supplies.

This would put further pressure on the birr's exchange rate and increase the cost of imported goods, fuel and industrial inputs.

However, the extent of these effects on the BRICS member state would also depend on export earnings, monetary policy and developments in international markets.

A fresh surge in inflation is therefore a risk rather than an inevitable consequence of renewed fighting. For poorer households, the combination of rising prices and uncertain incomes could be particularly devastating.

Agriculture and tourism among the most vulnerable sectors

Agriculture, tourism and hospitality are among the sectors Abdulmenan Mohammed considers particularly vulnerable to renewed conflict.

"Agriculture is especially exposed because much of the fighting takes place in rural areas where farmers work," he said.

Insecurity around farmland, disrupted transport networks and shortages of agricultural inputs could undermine food production.

The challenges are compounded by insufficient rainfall in some parts of the country and poor harvest prospects. Failed harvests reduce farmers' earnings, while declining food supplies could push prices even higher.

Tourism is equally sensitive to security concerns. Travel advisories and reports of fighting could discourage international visitors, reducing business for hotels, tour operators and other players in the hospitality industry.

Could neighbouring countries benefit from Ethiopia's crisis?

Political instability and insecurity could also affect Ethiopia's attractiveness as an investment destination, potentially creating opportunities for neighbouring economies.

When deciding where to invest, international companies consider more than market size. Political stability, security and the reliability of government institutions also influence their decisions.

A further escalation of violence could therefore delay investment plans or prompt businesses to explore alternative locations.

However, there is currently no concrete evidence that companies are already withdrawing investments from Ethiopia because of the fighting and relocating them to neighbouring countries such as Kenya.

Abdulmenan Mohammed also sees no demonstrable economic advantage for Kenya at this stage.

He notes that security is only one of several factors investors consider, with tax administration, public services and governance also playing a decisive role in determining where businesses choose to operate.