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A railway construction site in Kombolcha, Ethiopia, used now as a makeshift camp for hundreds of people displaced by the ongoing war, in May.Samuel Getachew/The Globe and Mail

After 20 months of civil war, the damage to Ethiopia’s once-soaring economy is visible across the country. At a stalled railway project, homeless war victims have taken possession of the empty construction site. At a newly opened industrial park, buildings have been unofficially converted into a prison and a warehouse for emergency food rations.

When Abiy Ahmed was sworn in as Prime Minister in 2018, there were hopes that one of Africa’s most populous and strategically important countries could be transformed. Many Ethiopians believed he would end the traditional narrative of an aid-dependent nation.

The energetic young leader promised to unlock the impoverished economy and liberalize state-dominated sectors such as banking, aviation and telecommunications. But today, Ethiopia’s economy is in tatters. Reform momentum has eroded, the national currency has weakened, inflation is at a near-record high – almost 40 per cent – and foreign investment has slowed. The International Monetary Fund is warning of more trouble ahead, with GDP growth projected to fall from 6.3 per cent last year to 3.8 per cent this year, the lowest in almost two decades.

The declining growth in the country of 115 million people is a result of “the conflict in Northern Ethiopia, lower agriculture production, a sharp fall in donor financing and intensifying foreign exchange shortages, drought, and spillovers from the war in Ukraine,” IMF deputy division chief Sonali Jain-Chandra said in a statement at the end of her visit to Ethiopia last month.

Despite the slumping economy, Mr. Abiy has continued to pump billions of dollars into his military budget this year. Higher spending, combined with a sharp drop in tax revenue during the war, is causing the budget deficit to balloon, the IMF said.

The military spending, meanwhile, has sustained a cycle of destruction and violence that only worsens Ethiopia’s economic woes. As many as 500,000 people have died as a result of the war in the Tigray region, in Northern Ethiopia, researchers estimate. New outbreaks of violence and mass killings continue to emerge in other regions, including Oromia and Gambella in recent weeks.

Late last year, Tigrayan rebels captured and looted a construction site for a 390-kilometre-long railway in Northern Ethiopia, destroying hundreds of trucks, bulldozers and excavators in the town of Kombolcha.

The US$1.7-billion project was considered crucial for the landlocked country, connecting the north to a major railway between Addis Ababa and the Red Sea port of Djibouti. Turkish multinational Yapi Merkezi had almost completed the seven-year construction project at the time of the attack, which brought it all to a halt and threw thousands out of work.

The construction site has now become a makeshift camp for hundreds of people displaced by the war.

The government still hopes to revive the project. “We are in discussion with the company and we still see the project as a priority,” Hilina Belachew, the chief executive of the Ethiopian Railways Corporation, told The Globe and Mail.

Last year, Mr. Abiy cut a red ribbon to open a 50-hectare industrial park in the city of Semera, in the Afar region. He said it would attract textile investment and become “a catalyst for accelerated trade along a key import-export corridor.” But today, after war swept through much of Afar, the industrial park is mainly used to store humanitarian food supplies for war victims. It is also used as a prison for Tigrayan detainees, local residents told The Globe.

The war has also cost Ethiopia its membership in the African Growth and Opportunity Act (AGOA), a U.S. program that provides duty-free trade benefits in key industries. U.S. President Joe Biden suspended Ethiopia from the program in December, citing “gross violations of internationally recognized human rights” since the war began.

The suspension has led to tens of thousands of job losses in Ethiopian textile factories. Best Garment, an Indian company, is one of many suffering the consequences. It announced last month that it will lay off more than 3,000 employees because of the AGOA decision.

Mr. Abiy has tried to push ahead with his privatization plan, but the war has dampened investor interest. When his government offered investors a chance last year to bid for a licence in the previously closed-off telecommunications sector, only two companies submitted formal bids.

A consortium led by Kenyan-based Safaricom was the eventual winner, with an US$850-million bid. After announcing plans to launch its service in April, it has repeatedly pushed back the start date. The continuing violence in several regions is expected to hamper its ability to operate nationally.

Shortages of foreign currency, which curtail the import of raw materials, are another major obstacle to investment in Ethiopia. One of the country’s biggest bottling companies, MOHA Soft Drinks Industry, has reportedly halted production in Ethiopia because of such shortages.

With a report from Geoffrey York in Johannesburg

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