Eritrea and Ethiopia look forward to a brighter economic future

Peace accord set to unlock new potential after years of conflict comes to an end

Passengers at Asmara International airport after Ethiopia and Eritrea resumed commercial airline flights. AFP

The ink has barely dried on the peace accord between old rivals Eritrea and Ethiopia, but the economic landscape of the Horn of Africa has already begun to change.

For 20 years the countries fought a border war that claimed as many as 100,000 lives. Ethiopia was cut off from the Red Sea, and Eritrea sealed itself off from the rest of the world. In the past couple of months a peace deal has been concluded. Long-dormant border posts have opened and soldiers guarding the frontier between the two pulled back.

The swift end to the conflict was largely thanks to a change in leadership in Addis Ababa, with Ethiopia Prime Minister Abiy Ahmed taking office in March. Almost his first act once in charge was to put an end to the long-standing enmity with Ethiopia’s neighbour.

“Rapprochement with Eritrea serves a range of foreign policy objectives, including potentially depriving Egypt of an ally in the on-going dispute over use of the Nile,” said Barnaby Fletcher, senior analyst Southern Africa at specialist global risk consultancy Control Risks.

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In July air links were re-established, and passengers weeping with joy disembarked from the first Ethiopia Airlines flight to land in the Eritrean capital, Asmara, in 20 years. The Eritrean flag is once again flying above the once-abandoned embassy building in Addis Ababa.

A top UN official, however, said now is the time for the international community to provide support for both nations as they bid to recover from the conflcit.

"I hope the international community will come forward to support these two countries. It is very important - not just for these two nations, but for regional peace and security," Ahunna Eziakonwa, head of the UN in Ethiopia, told Reuters.

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"It makes strategic sense – not just from the humanitarian perspective, but also from a security perspective – to rally behind this peace initiative and invest in a peace building process in a way that it touches on development transformation."

Still, Eritrea is seeing the benefits of the new era. In mid-July, Canadian resource conglomerate Lundin said in a filing with the Toronto Stock Exchange that it would make an immediate cash offer for Eritrea's only commercial mining operation, the Bisha gold-and-copper producer in the country's hinterland.

The mine is majority owned by fellow Canadian resource company Nevsun, in partnership with the Eritrean government. It cost an initial $250 million to build and opened in 2011. Bisha now consists of 10 per cent of Eritrea's gross domestic product, according to the World Bank.

Eritrea has a lot more untapped resource potential, including vast potash resources – a crucial element in modern fertilizers. Whoever owns Bisha will have a head start in future mineral licences, but potential suitors will have to move fast.

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Lundin chief executive Paul Conibear said in the TSX filing that the company had started talks over the mine's future in February. With the peace agreement, however, Ludin risked Bisha being scooped up by a rival, so had opted to drop talks and go directly to shareholders.

“After having made a series of proposals and observing significant recent changes in the political landscape related to Eritrea, we have determined that the best course now is to make an all-cash offer directly to Nevsun shareholders,” Mr Conibear said.

Apart from Bisha, Eritrea is almost entirely dependent on agriculture for economic growth. Other mining companies are also now looking at setting up operations. Australian firm Danakali has toiled for years to drum up investor support for its proposed 1 billion tonne a year potential potash mine that straddles the border between Eritrea and Ethiopia.

There is enough potash available to keep the operation, named Colluli, going for two centuries according to Danakali’s investor prospectus. Soon it plans to list in London, which the company says will value Danakali at more than $900m.

“It also promises to be a major contributor to the Eritrean economy through exports, employment and skills,” Danakali executive chairman Seamus Cornelius said. “We look forward to bringing Colluli into production and building value for our shareholders and stakeholders."

As much as the new order benefits Ethiopia and Eritrea, there is one significant loser; Djibouti. The coastal enclave on the Gulf of Aden was for decades the “undisputed winner” of the conflict between Eritrea and Ethiopia, says Kelsey Lilley, associate director of the Atlantic Council’s Africa Centre.

The country has been the gateway for sea trade to Ethiopia, which receives around 97 per cent of its imports through Doraleh Container Terminal – around 70 per cent of the port's activity.

“Djibouti has been the longtime beneficiary of Eritrea’s isolation and it has essentially been Ethiopia’s only port option,” Ms Lilley says. “As Ethiopia warms to Eritrea and has the opportunity to use the latter’s multiple ports, Djibouti will need to re-calibrate its business model.”

Djibouti President may have become lulled in complacency that the country would continue to benefit from the seemingly endless conflict between Eritrea and Ethiopia. So much so that Djibouti felt confident enough to seize the Doraleh terminal from its operator, the UAE-based DP World.

Whatever advantages Djibouti sought by nationalising the terminal is now rapidly vanishing as the peace process opens up ports in Eritrea and even Somalia. As countries such as the UAE establish relationships across the Horn, and Ethiopia, too, builds new bridges with its neighbours, Djibouti risks a decline in relevance.

“The UAE has carefully positioned itself as a partner to many countries in the Horn of Africa, including Ethiopia, Eritrea, and Somaliland,” Ms Lilley adds.

Indeed, last month The National reported that in a strong display of support for new Ethiopian Prime Minister Abiy Ahmad Ali, the Abu Dhabi Fund for Development (ADFD) pledged Dh11 billion in assistance.

"The future of its relationship with Djibouti, however," adds Ms Lilley, "remains to be seen depending on resolution of the DP World – Doraleh Container Terminal dispute."