-It could cost Ethiopia 7.6 percent of GDP in 2022/23
-Urban rich will lose 26.8 percent income
A new study by the International Growth Center (IGC) projects Ethiopia’s overall economy would lose as much as 7.6 percent if the Russia-Ukraine conflict continues for the next year. In real terms, this can amount to a loss of up to USD eight billion.
IGC’s simulation used the Computable General Equilibrium (CGE) model, which compared prewar prices of wheat, edible oil, metal and metal products, fertilizer, and petroleum with those of shock after the war broke out in February 2022. The overall findings compared the Russia-Ukraine war shock scenario with the business-as-usual (BAU) scenario, which is done under the impact of COVID-19 and other natural and human-made crises during the period.
The findings indicated Ethiopia’s service sector would be the most affected, with a 10 percent decline, followed by agriculture at 5.8 percent and industry at 4.3 percent. The losses are primarily caused by an 86 percent increase in petroleum prices, a 108 percent rise in DAP fertilizer prices, an 82 percent upsurge in metal product prices, a 100 percent soar in wheat prices, and 11 percent in the case of edible oil prices, according to the study.
“The expensiveness of the commodities will have a crippling impact on Ethiopia’s sectors that rely on imported inputs. If Ethiopia has no foreign currency to import those inputs, the output of domestic sectors will decline. The decline of sectors will have a negative impact on GDP of more than seven percent. This loss is an estimation for 2022/23, if the war in Ukraine continues and the international supply disruption is not solved,” said Tewodros Makonnen (PhD), Ethiopia country staff of IGC who participated in the study.
The global price surge has already impeded economic activities in Ethiopia in the just ended Ethiopian fiscal year of 2021/22. In particular, Ethiopia’s import of agricultural fertilizer dropped by one third, as the import bill of fertilizer doubled to USD 1.2 billion after the Ukraine war.
Ethiopia imported 12 million quintals of fertilizer this year, down from 18 million quintals last year. Ethiopia’s import bill of petroleum has also doubled for the next year from USD three billion in the past years, according to the Ethiopian Petroleum Supply Enterprise.
“We strongly recommend Ethiopia embark on import substitution of those items, as covering the soaring prices is difficult for Ethiopia due to the foreign currency shortage. For instance, fertilizer can be produced locally, and natural fertilizer like compost can also be used. On the other hand, Ethiopia can benefit from the increasing international prices by exporting,” added Tewodros.
Ethiopia, along with the rest of the world, experienced a sharp rise in prices of key commodities with the onset of the war in Ukraine. In June 2022, the 12-month moving average price of crude Brent petroleum increased by 64 percent over June 2021. Wheat prices increased by 48 percent, while the cost of edible oil surged by roughly 49 percent during the same time period.
Given that Russia is the biggest exporter of nitrogen-based fertilizer, the second and third most important global supplier of potassium and phosphate respectively, the Russia-Ukraine war has impeded supply and led to global increases in their prices, stated the IGC study.
As the economy suffers from the impact of the Russia-Ukraine war, the “urban rich” in Ethiopia would also experience the largest reduction in income at 26.8 percent, while the incomes of the “urban poor” would be least affected, dropping by 4.2 percent.
The “rural poor” would also be more negatively affected than their urban counterparts, owing to their smaller savings and less ability to absorb price increases. The rural rich’s income drops at a 19.6 percent rate, while the rural poor at 15.1 percent.
The employment loss of unskilled labor is also estimated at a staggering 17.7 percent, according to the study.
Ethiopia’s Ministry of Planning and Development has also conducted an assessment on the economic impact induced by the Russia-Ukraine war. However, the ministry did not disclose the impact assessment.
Fikadu Digafe, chief economist and vice governor of NBE, refrained from commenting on the study.