The recent Memorandum of Understanding between Somaliland and Ethiopia has sparked conversations about its economic implications. What does this agreement mean for both countries and the region as a whole?
Somaliland’s lack of international recognition has long hindered its economic development, while Ethiopia has been looking to secure access to the Red Sea for its landlocked economy. The agreement between the two nations could potentially address these economic needs and more.
In this comprehensive analysis, we will explore the economic implications of the Somaliland-Ethiopia agreement, shedding light on the potential benefits and challenges that may arise. From foreign investment opportunities to shifts in economic focus, there is much to consider in this evolving relationship between two strategically located countries in the Horn of Africa.
Furthermore, the economic performance of Somaliland is highlighted, showcasing its development despite being an unrecognized territory within Somalia. The private sector, including telecommunications, remittances, and livestock exports, has played a significant role in driving economic growth and job creation. The expansion of infrastructure, such as ports and road networks, has improved connectivity and facilitated trade in the region.
In recent years, Somaliland’s economy has experienced growth, with increased investment in infrastructure, trade activities, and recovery from the impacts of the COVID-19 pandemic contributing to a boost in real GDP. Inflation and exchange rate stability have been maintained, creating a favorable economic environment for investors in Somaliland.
Overall, the paper provides a comprehensive analysis of the economic landscape in Somaliland, the implications of the memorandum with Ethiopia, and the key factors driving economic growth in the region.
Memorandum Of Understanding Between Somaliland and Ethiopia
Shab’an H. Yusuf
Public Administration and Development Management
Public Policy and Management
Haramaya University, Dire Dawa Region
Shabcaan2001@gmail.com
Abstract
This paper offers an analysis of the Ethiopian-Somaliland Agreement, with regards to the Economic environment of both countries and its implications. It highlights that the lack of international recognition in Somaliland affects foreign investment inflows into the territory. The paper also takes note of the economic shift in Somaliland towards a service-oriented economy anchored on the Berbera port trade. Additionally, it underscores the need for global acceptability as an impetus for future economic growth as well as dominance by unregulated sectors. Furthermore, it examines Ethiopia’s agricultural reliance and desire to secure Red Sea entry points through this treaty, among others, including possible geopolitical implications of such agreement within regions characterized by conflicts. Lastly, the abstract points out increasing tensions between Somalia and Ethiopia, which may result in a wider regional war.
Keywords: Berbera Port; Agriculture; Red Sea; Ethiopia; Somaliland; Economic Environment; International Recognition; Foreign Investments; Unorganized; Regional Conflicts.
Introduction
Economic Performance of Somaliland
Somaliland is a self-declared country that has made outstanding development in terms of economic overall performance over time. Despite being an unrecognized territory, it has managed to establish a noticeably solid financial system in comparison to other areas in Somalia. One of the important factors contributing to Somaliland’s financial boom is its vibrant non-public sector, which has played a crucial role in driving investment and entrepreneurship. The business network has actively engaged in various sectors together with exchange, cattle, telecommunications, and remittances, contributing to the job creation and sales era (World Bank, 2016).
The private sector in Somaliland plays a crucial function in the economy, as highlighted in the 2016 World Bank, report on the economic sectors of telecommunications and remittances in Somaliland. The telecommunications sector has a skilled sizable boom, with improved access to mobile telephones and internet services. This has contributed to progressed connectivity and communique within the boom of telecommunications has additionally caused extended get entry to economic services, together with cell banking and mobile cash transfers, similarly contributing to the development of the personal sector.
Remittances also play a full-size role in Somaliland’s economy. Many enterprise proprietors and executives in Somaliland acquire remittances from overseas, which function an essential supply of income and funding. Remittances contribute to household intake and savings, as well as funding in corporations and infrastructure improvement. (Hammond, 2013).
The livestock sector, especially the export of goats and sheep, is a sizeable pillar of Somaliland’s economic system. Livestock husbandry is the dominant machine of manufacturing in Somaliland, with over half of the population worried in a few form of animal husbandry (Ministry of Investment, 2014).
The livestock rearing quarter contributes approximately 60% of the GDP and presents employment for over 70% of the population It also has widespread capability for growth and employs development, especially in value addition, marketplace access, and disorder manage. (Ahmed et al., 2015).
Infrastructure improvement has also been a focal point in Somaliland, which includes the expansion of ports, airports, and road networks. These enhancements have superior connectivity and facilitate exchange inside the vicinity. (Ahmed et al., 2015).
Somaliland’s economy has shown growth and development in recent years. According to the Somaliland GDP for 2021, a significant increase in real GDP with a contribution of 1%, showing the best boost charge after a decade. This increase can be attributed to different factors, together with expanded investment in infrastructure, growing change sports, and restoration from the COVID-19 shocks. Inflation and alternate charge stability have additionally been maintained, imparting a wholesome monetary environment for investors (Somaliland GDP Report, 2021).
Economic Performance of Ethiopia
With a population of about 126.5 million people, Ethiopia is the second most populous country after Nigeria. It has also emerged as one of the fastest-growing economies in the space. According to the World Bank, Ethiopia has consistently achieved GDP growth of more than 7.2% per annum over the past decade, driven by the implementation of a wide range of sectors, including agriculture, manufacturing and services (World Bank, 2024).
Ethiopia has made significant progress in poverty reduction, with the poverty rate decreasing from 44% in 2000 to 23% in 2016. This progress can be attributed to the government’s awareness of rural transformation, job creation, and livelihoods welfare systems. (World Bank, 2024).
In 2011, about 30% were actually poor, but in 2016 it dropped to 24%. But the poor fare no better than other countries, such as Ethiopia, and some people have more money than others. Furthermore, conflicts in different parts of the country can undermine its economic and human development. (World Bank, 2024).
According to Cannon and Rossiter (2017), agriculture remains the cornerstone of the Ethiopian economy, providing employment to a large number of people. The Government’s focus on promoting sustainable irrigation and land management practices aims to increase agricultural productivity, ensure food security, and feed the growing population has earned a solid income.
From a geostrategic perspective, Ethiopia’s interest in Berbera certainly makes sense. Of the three ports, Berbera is closest to Ethiopia proper and offers the potential of opening up the vast, albeit isolated eastern region of Ethiopia to trade, particularly in the export of livestock and agriculture. However, the port is located in the Republic of Somaliland, which declared its independence from the Republic of Somalia in 1991 but remains unrecognized internationally, therefore representing a political and legal headache for states wishing to engage with it substantively. (Cannon and Rossiter, 2017)
Infrastructure improvement has been a priority for Ethiopia, with splendid tasks which includes the Grand Ethiopian Renaissance Dam, contributing to increased energy production ability and stimulating commercial increase. These infrastructure projects no longer most effective decorate the home financial system but also role Ethiopia as a local hub for trade and investment. (World Bank, 2024)
Ethiopia has correctly varied its export base, expanding beyond conventional agricultural commodities. The USA has made strides in increasing its production and textile sectors, tapping into global markets, and growing export sales. This diversification has contributed to a more balanced and resilient economy.
Finally, Somaliland and Ethiopia have proven high-quality economic performance and boom. Somaliland has leveraged its vibrant personal region, mainly in sectors inclusive of telecommunications and remittances, even as additionally capitalizing on its livestock sources. Ethiopia, then again, has experienced a sturdy GDP increase, poverty reduction, improved FDI inflows, infrastructure development, and export diversification. These achievements mirror the commitment of both governments to fostering sustainable economic development and enhancing the livelihoods in their people. These international locations want to maintain imposing policies that promote sustainable development and deal with demanding situations such as unemployment and profit inequality.
Ethiopia-Somaliland Memorandum of Understanding
The agreement was a preliminary agreement between the Republic of Somaliland and Ethiopia and aimed to provide Ethiopian maritime access to the Gulf of Aden. It was a remarkable memorandum of understanding between officials of the country that led to ongoing tensions over in the Horn of Africa. On January 1, 2024, the President of the Republic of Somaliland announced a political agreement with neighboring Ethiopia to provide land to Ethiopia for the construction of naval bases off the coast of Somaliland provided. In fact, this is not without cost; the Republic of Somaliland expects Ethiopia to sign its recognition agreement.
It is well known that the other neighbor of Somaliland, Somalia doesn’t like the independence of the Republic of Somaliland because they believe that it is still part of Somalia. This agreement has angered Somalia because of the previously mentioned reason and it worries that Ethiopia will impinge upon its sovereignty. This crisis could easily escalate as the Federal Republic of Somalia is rallying international opposition to the deal while the two countries of Ethiopia and Somaliland seem determined to go on with the agreement.
This agreement further increases any geopolitical tensions and alter the regional allegiances. The two countries of Somalia and Egypt could grow closer and closer and the tension between Ethiopia and Eritrea will again rise more likely. Moreover, the tensions and rivalry between Djibouti and Somaliland will be more intense. However, the most prolific tension which could rise is that between Somaliland and Somalia and it has already been seen in a recent incident were an Ethiopian plane headed to the Republic of Somaliland has been turned back by the Federal Republic of Somalia. The Republic of Somaliland, without international recognition, would always be integrated with Somalia which makes it even harder for them to get recognition even sooner and easier.
From a second point of view, the rising tensions could lead to a regional conflict, more likely resulting in further fragmentation and reviving Ethiopian nationalism by rallying them against an external enemy. The same case could be applied to the republic of Somaliland, the political and social tensions in the republic could be easier to solve and deal with if the attention of the public is led to an external enemy – Somalia, Egypt, Eritrea, and Djibouti.
“Alternatively, Egypt concludes that Ethiopia’s ambitions in the Red Sea (including a military base) are an existential threat to its national security. Like the Nile, the Red Sea is vital for Egypt, with revenues from the Suez Canal amounting to more than $9 billion in 2023.” (Nogueira, 2024)
Almost a decade after Ethiopia officially began to pursue port utilization in Somaliland and nearly after the signing of the Ethiopia-Somaliland Berbera Port Agreement for the United Arab Emirates, this quest remains unfulfilled well, and its consequences are very limited in implementing the development of the Ethiopian Berbera port and infrastructure. Berbera is an important port in the maritime trade of the Indian Ocean. Thus, changing geopolitical dynamics had an impact on the implementation of the Port Agreement. Unfortunately, there are no local voices (Tazebew, T. 2023).
Potential Slipovers for neighboring nations
Source: Financial Times
1. Djibouti
For Djibouti, the Ethiopia-Somaliland Port Agreement may have implications. Djibouti is currently a key hub for Ethiopia’s import and export trade, as Ethiopia relies heavily on the Port of Djibouti for maritime communications A port agreement with Somaliland could provide an alternative for Ethiopia through which to trade, affecting Djibouti’s status as a major trading partner.
Djibouti, this agreement will have a very influential impact on both the economy and the politics of the nation by various factors including the competition for port services. Djibouti is one good maritime hub in East Africa that depends heavily on its ports for economic activities. This includes transshipping and serving as a gateway for the landlocked countries in Africa such as Ethiopia. This agreement would actively provide another port for Ethiopia to do businesses and economic transactions on which would be a great competition for Djibouti. Djibouti might need to comparatively change its policies and strategies to adapt to the new competition in the market.
In order for Djibouti to maintain its competitiveness in the East, it will need to invest in vast quantities in logistics and infrastructure. This must involve enhancing port efficiency and expanding port activities for the better. Improving the transportation networks and streamlining custom procedures must also be invested in. Djibouti will have to seek to attract even additional investments and strengthen its position as a trade hub in east Africa.
This agreement could influence Djibouti because there would be a potential for regional cooperation among the three nations, Somaliland, Ethiopia, and Djibouti. The presence of multiple ports and transport corridors in the region would present opportunities. The three countries could explore collaborative initiatives to enhance the connectivity between them and establish more transport links. It is not much likely to happen but would be a great way of increasing trade and economic integration in the East.
Overall, this agreement presents a significant challenge to the economic dominance of Djibouti. Being one of the main port gateways of Ethiopia, Djibouti could lose its economic dominance and severely damage its economic situation. Although the potential impact on Djibouti would depend on the specific terms and implementation of the agreement between Somaliland and Ethiopia.
2. Somalia
In the case of the agreement between Somaliland and Ethiopia, the impact on the Federal Republic of Somalia would be severely damaging to relations in the east. The impact would involve territorial and political implications. As it is well known in the east, Somalia does not recognize Somaliland as a separate nation but a part of Somalia, in case the agreement between Somaliland and Ethiopia prevails, it will raise territorial and political concerns for the Somali government, which will most likely lead to disputes over the sovereignty of the republic of Somaliland.
This agreement could also damage the diplomatic and regional dynamics. The involvement of Ethiopia in the agreement could have a broader diplomatic implication within the East. There is a historically complex relationship between the Federal Republic of Somalia and Ethiopia in aspects like political, security, and economics. The agreement would most likely damage the regional dynamics in the East.
There would also be potential economic competition because Somalia also has its own ports, like that of Bosaso and Mogadishu. The agreement would present a potential alternative port for Ethiopia, which would create competition for the ports in Somalia, which would generally have an impact on the generated revenue of Somalia from the port services and trade-related activities.
The MoU states that the recognition of Somaliland as a separate state from the Federal Republic of Somalia is just one step away which is an exchange for 20km sea access for the Ethiopian naval forces and a lease for a period of 50 years. The Federal Republic of Somalia claimed that the agreement between Somaliland and Ethiopia is an act of “aggression”. This means that a political crisis between Somaliland and Somalia could rise to the peak because of the interference of Ethiopia.
3. Eritrea
Regarding Eritrea, the potential spillover effects are uncertain. Eritrea has been isolated from regional trade for many years due to political tensions and conflicts. The port agreement between Ethiopia and Somaliland may not have an immediate impact on Eritrea, as its ports and trade infrastructure would need significant development and normalization of relations with Ethiopia to attract trade flows. However, in the long term, we can discuss the potential slipovers on Eritrea. Eritrea is a nation which has its own ports and maritime economy. Much like Somalia, if there would exist another alternative port for Ethiopia to trade it would create an unwanted competition in Eritrea. And much like Somalia, this could impact and even lower the generated income from the port services and activities.
Eritrea’s relationship with Ethiopia and Djibouti would be severely impacted if the agreement prevails, this can alter the regional dynamics of the East and influence the trade power and relationships within the East.
4. Sudan/South Sudan
In case the agreement prevails, Sudan and South Sudan could benefit from the prevailing trade routes. Sudan and South Sudan rely heavily on the ports of the neighboring countries such as Kenya and Uganda. (Desiderio, 2022).
This reliance on further trade routes and sea ports could become much simpler if the MoU prevails because there would be new trade routes and sea ports and the trade between the two countries and Ethiopia could rise like never before. This helps diversify the country’s trade routes and reduce the dependence on one specific trade route.
Both countries share their borders with Ethiopia. This can ease the diplomatic implications for the two countries and their relationship with Ethiopia plays a significantly vital role in the dynamics of the east. This can also further stabilize the region’s security; it can be affected by the developments in the neighboring countries.
5. Egypt
There have always been tensions and disputes over the Nile River for decades, it is said that the relationships among the Nile’s ten countries are usually governed by a set of agreements and treaties signed during the last century to reduce the conflict and potential wars and battles. These are known as the Nile River Agreements. Countries including Kenya, Ethiopia, Uganda, and Tanzania have to respect every right of the downstream countries, but mostly Egypt and Sudan. As Egypt is the last and the country that benefits most from the Nile, it would be the most potentially damaged country by any mistreatment of the Nile River Agreements. Ethiopia, on the other hand, had plans to build dams and construction projects along the Nile. (Al-Anani, 2020).
Egypt is most likely one of the most consequential countries in east Africa alongside Ethiopia, their cooperation is very essential for the region’s peace and development. Because the Nile is urgent and mutually beneficial for both countries, it is merely impossible to maximally satisfy each of their needs and interests. (Al-Anani, 2020).
Now with all this history between Ethiopia and Egypt, which is why Egypt has expressed its full respect for the unity of the Federal Republic of Somalia over its entire territory, including Somaliland. This is a clear expression of opposition to the MoU pact between Somaliland and Ethiopia, this would mean that Somaliland and Egypt would become enemies because of the “friend of my enemy is my enemy” rule. It also indicates that the federal Republic of Somalia and Egypt are now very close friends and allies.
6. Kenya
In the case of Kenya, spillover effects may also be limited. Kenya has well-established trade routes and ports, such as the Port of Mombasa, which is a major gateway to East Africa. A port agreement between Ethiopia and Somaliland is unlikely to significantly change Kenya’s trade dynamics unless there is a significant change in the cost and efficiency of the new route. However, it should be noted that regional integration efforts such as the East African Community (EAC) aim to promote trade and communication between member states, and there has been improvement in Ethiopia-Somaliland relations can have a significant impact on local cohesion. (Hassen, M. 2024)
Unlocking Synergistic Gains: Exploring the Positive Spillovers of the MoU
According to Hassen (2024), the MoU is also exemplary to the aspiration of the African Union (AU) for having nearby integration. As one among the largest marketplaces in Africa and a giant economic system, Ethiopia will convey opportunities to Somaliland in phrases of trade, railway creation, aviation development, job creation, amongst others, he said.
Somaliland would permit Ethiopia to facilitate its import-export change by presenting a seaport, and its products may be without difficulty handy for nearby and worldwide markets. It is likewise a terrific precedent for different landlocked East African and other African nations to amplify their get admission to seaport like South Sudan. (Hassen, 2024)
“It could be too speculative to link the settlement to Somaliland’s present-day home problems, thinking about its persistent pursuit of worldwide popularity given that 1991,”
“Somaliland set up diplomatic ties with Ethiopia long earlier than the port deal turned into announced.”
Muhammad Abdi Duale, founder and senior editor of the Somali information portal Horn Diplomat, told Al Jazeera.
As President Bihi introduced, Ethiopia might recognize Somaliland as a self-declared impartial location that has been seeking respectable international popularity for the beyond decades.
As the National Security Advisor of Abiy Ahmed, Mr. Redwan Hussien mentioned, Ethiopia has dedicated to undertaking an in-intensity assessment regarding the feasible professional recognition of Somaliland. But, Somaliland’s Ministry for Foreign Affairs said that Ethiopia will be the first to formally recognize the de facto country, the Ethiopian leadership has now not without delay commented on this count. However, Addis Ababa has defended its function via putting forward that the settlement is not illegal and that different parties have also entered into similar agreements with Somaliland, no matter its lack of worldwide reputation.
The agreement has the potential to impact the inflation of both countries, which depends on various factors, including the scale of trade activities by the port and even the economies of both nations. First, in the case where the agreement leads to a very well-increased trade between the two countries, it will stimulate economic growth and investment, which may drive up the income of households and the whole GDP of the country and could lead to drive up the demand for goods and services in both nations. This obviously leads to higher amounts of inflation if the supply cannot keep up with the demand. The agreement could lead to an investment in port infrastructure and logistics, which can lead to an enhancement in the efficiency and capacity of transportation and trade. This, in return, improves the supply chain and has a positive impact on inflation by reducing costs and increasing productivity. The foreign direct investment can also have the potential for having a positive impact on inflation by boosting supply and competition.
The agreement would also have an impact on unemployment by creating more jobs within the port only, this would increase trade, investment, and the overall economic activity of both nations. The expanded trade can stimulate the demand for labor in sectors such as manufacturing and services. It can also have an impact on unemployment by increasing and enhancing the local workforce in both nations.
The trade balance always refers to the difference between the value of a country’s exports and the value of its imported goods and services. When a country’s exports exceed its imports, this is called a trade balance. The impact of the agreement on the trade balance of both nations depends on several factors, which are the export expansion, the export expansion leads to an increase in the exports of goods and services by potentially improving the trade balance and generating more revenue from the overseas market.
The impact of the seaport agreement on the exchange rate of the nations of Somaliland and Ethiopia would depend naturally on various factors, such as the increased foreign currency inflows, this leads to increased trade and investment in the economy, which can potentially result in higher inflows of foreign currencies in both nations. This would also potentially increase the demand for the local currency, which can strengthen its value in relevance to other currencies. In case where the agreement enhances a country’s capacity for exports, this can lead to an improvement in the trade balance of the nation. A trade surplus could mean that a country’s exports exceed its imports, which can enhance the demand for the local currency as much as foreign direct investment (FDI). also potentially contribute to the increased capital inflows.
Conclusion
This agreement has significant implications for the foreign policy of Somaliland towards Somalia, as it prioritizes its interests and those over historical ties with Somalia. The deal has been met with opposition from the Somalia government, which has declared it null and void.
However, Somaliland’s Ministry of Foreign Affairs has stated that the recognition marks a significant diplomatic milestone for the country. Relevant foreign actors and multilateral organizations have remained cautious in responding to the agreement, refraining from doing anything that might upset the status quo of Somalia’s de jure authority, while also not explicitly condemning the contents of the agreement.
The relationship between this historic MoU and Somaliland’s evolving approach to acquiring long-awaited international recognition, argues that the Ethio-Somaliland Accord marks a turning point for both countries. The success of the agreement, as long as the international community supports it in resolving the potential disagreements arising from its alteration of geopolitical power relations, will determine the future of regional integration and cooperation in the Horn of Africa.
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