Yonas Biru, PhD
If the Iran war is sustained much longer—and especially if it expands to threaten Gulf oil exports—few countries are more vulnerable than Ethiopia, given its current economic, political, and social fragilities. Over the past three years, I have traced the interconnected and cross-reinforcing fault lines beneath Ethiopia’s governance, economy, and society—along with proposing solutions.
A recent 30-page analysis titled “Ethiopia on the Brink: The Politics of Abundance in an Economy of Scarcity” led me to an uncomfortable conclusion: a prolonged Gulf conflict would not just harm Ethiopia—it could, under certain conditions, push the country to the brink of collapse. That article detailed the transmission mechanisms by which a crisis in one area triggers crises in others, and it offered short-, medium-, and long-term solutions. Instead of heeding these warnings, the Prime Minister gave an hour-and-44-minute interview touting the marvels of his economic policy and achievements, seemingly oblivious to the looming disaster.
A sustained Iran conflict could disrupt oil shipments through the Strait of Hormuz or strike Saudi/UAE facilities, sending crude above $130 a barrel. This article digs deeper into the transmission mechanisms triggered by fuel shortages and foreign exchange (FX) constraints, showing how these factors act as force multipliers—turning economic stress into an existential threat.
The fuel shock
In 2017, a year before Prime Minister Abiy took office, the central bank’s FX reserves covered 1.8 to 2.5 months of imports. As of April 2026, reserves cover just 1.5 months, far short of the globally recommended three months. Ethiopia already suffers from a chronic shortage of foreign currency. Even peacetime fuel prices strain the system.
Now imagine oil at $130 a barrel for three months. The government faces a lose-lose choice: absorb the cost, blow a hole in the budget, and violate IMF fiscal conditionality—or pass the cost on to drivers and factories and watch cities explode. Recall Nigeria in 2023, when a modest fuel subsidy cut triggered mass protests. Ethiopia is more fragile, not less.
Fuel is deeply embedded in the economy. Trucks move food from farms to Addis Ababa. When fuel prices rise sharply, so does the cost of transport, bread, and housing. Urban families already spend half their income on food. A 40 percent rise in food inflation means they stop buying everything else. Small businesses fold.
The construction sector collapse
The Iran war’s oil shock has a significant, multi-layered impact on construction. The sector is heavily dependent on diesel-powered machinery—excavators, bulldozers, cranes, generators. Diesel prices have risen even more sharply than gasoline due to diesel’s critical role in global logistics and tighter supply-demand balance. Fuel can account for 20–30% of heavy equipment operating costs.
Moreover, materials like cement, steel, sand, and gravel are bulky and transported over long distances. Higher fuel costs can increase material costs by 5–15%, depending on distance and supply chain efficiency. Cement production is especially energy-intensive, adding further cost pressure.
The confluence of these pressures means construction sites will go quiet. A fuel shock becomes a full economic shock in under four months.
Impending real estate bust
Ethiopia’s property market is already fragile—too much speculative building, too few legitimate buyers, and every developer dependent on imported steel and lifts.
When construction costs spike by a third and buyers vanish, projects stall. Prices stop rising—not necessarily a crash, but a freeze. A frozen market means developers cannot repay bank loans. Under normal circumstances, this takes six to eight months. But insecurity accelerates it to four months.
The Banking Sector: A Terminal Diagnosis
Ethiopian banks, primarily undercapitalized and mostly private, are currently exposed to a quadruple threat: (1) a stagnant real estate market with non-performing loans (NPLs) of 20–30%, (2) importer defaults, (3) heavy government crowding out of private credit, and (4) hidden regional security debt.
Many regional administrations (Afar, Somali, Sidama) maintain security apparatuses financed through local revenue and regional bank borrowing. As federal transfers dry up under the weight of $130 oil, these regions will default. Unlike federal debt, these regional defaults lack a sovereign guarantee; the central bank’s likely refusal to bail them out will trigger a cascade of local bank runs, turning a distressed sector terminal.
Add real estate NPLs, importer defaults, and government crowding, and you have a banking sector that is not just distressed—it is terminal.
The social dimension
Food inflation in Addis Ababa does not just mean hunger. It means anger. Urban youth will take to the streets. Ethiopia has no safety net—no unemployment insurance, no food stamps. When bread prices double, the first response is a demonstration. The second is a riot.
The new law that allowed deployment of Oromia regional forces and aligned militia elements into Addis Ababa is part of the Prime Minister’s effort to fortify the city against potential riots. This is a dangerous development that will escalate the crisis rather than thwart it.
The political dimension
Ethiopia’s ruling coalition (or what remains of it) governs through a system of ethno-regional parties. Every region blames the center. Every opposition group smells opportunity. A fuel-driven inflation spike would be weaponized instantly: Oromo nationalists would call it Abiy’s failure; Tigrayan factions would demand compensation; Amhara militias would frame it as Addis Ababa bleeding the regions. The political center cannot hold when every region’s grievance is validated by a real economic shock.
The security dimension
This is the most dangerous. Ethiopia already has active armed conflicts: ongoing insurgencies in Oromia (OLA), Amhara (Fano militias), and a fragile, unfinished peace in Tigray. All of these armed groups need fuel—for trucks, generators, and logistics. When fuel becomes scarce and expensive, they will compete with the national army—and with each other. When armed groups cannot get fuel, they do not disband. They loot. They seize fuel depots. They attack convoys.
Worse: The Ethiopian National Defense Force (ENDF) itself is fuel-dependent. If the military cannot pay for or secure diesel, its ability to project power collapses. This is not theory. In Tigray (2021), fuel shortages directly stalled government offensives. In a new crisis, the army might pull back to defend Addis Ababa, leaving regions to armed groups. That is not civil war—it is state fragmentation.
The feedback loop: Death spiral
Economic pain fuels political rage. Political rage fuels armed mobilization. Armed mobilization disrupts trade routes (the Djibouti corridor, the main artery for 95% of imports). Disrupted trade routes make fuel and food shortages worse. And the government, squeezed by the IMF and facing a banking crisis, cannot afford to pay soldiers, police, or regional security forces.
That is not a collapse. That is a death spiral.
Then the world looks away
The external shock arrives just as the internal one peaks. Ethiopia receives about $1.5–$2 billion a year in aid—from the US, the EU, and the World Bank. A major Iran war will pull donor attention and budgets toward the Gulf, Ukraine, and Sudan. Even if aid is not cut, disbursement delays of six to nine months mean the money does not arrive when banks are collapsing and regions are arming themselves.
Foreign investment—mainly Chinese and Turkish firms building industrial parks—will pause. No one breaks ground when the security situation is deteriorating, and dollars are unobtainable. At that point, you have a triple lock: no dollars, no security, no political cohesion.
The rural food security dimension
Ethiopia’s food insecurity is not only an urban problem—it is a national crisis with deep rural roots. The country’s agriculture is overwhelmingly rain-fed and highly sensitive to fuel and fertilizer availability. Diesel is essential for irrigation pumps, mechanized plowing, and transporting harvested crops to local and urban markets. Fuel shortages, driven by an external oil shock, can directly reduce both crop production and market access.
Fertilizer shortages compound the problem. Ethiopia imports nearly all of its commercial fertilizers, and delivery relies on diesel-powered logistics. Price spikes in fuel and foreign exchange constraints can delay fertilizer distribution, reduce usage, and decrease yields.
Transport bottlenecks threaten urban food security as well. Even if rural farmers produce enough grain, fuel scarcity can prevent trucks from moving goods to Addis Ababa, Dire Dawa, and other population centers. When rural surpluses fail to reach cities, prices skyrocket, urban families are pushed further into poverty, and social unrest escalates.
In short: fuel shortages, FX constraints, and rising input costs do not only threaten urban life—they imperil the entire food system, making famine a real possibility in a crisis scenario. Any analysis of Ethiopia’s vulnerability must integrate rural agriculture, market logistics, and national food security into the economic and political picture.
Conclusion: A warning, not a prediction
Some readers may see this article as unnecessarily alarmist. My response to them is a country that does not prepare for the worst-case scenario does so at its peril.
I do not know if war will come. No one does. But Ethiopia does not have the luxury of waiting to find out. Its foreign exchange position is already worse than Sri Lanka’s was before its 2022 meltdown. While Sri Lanka’s collapse was primarily a debt/FX crisis, Ethiopia’s is a polycrisis – debt, FX, civil war, and a commodity shock combined.
Sadly, Ethiopia is currently trapped between a Prime Minister who rules as an absolute monarch, and fragmented opposition forces that lack a cohesive national vision beyond local grievances. Each is trying to use the impending crisis to weaken its adversaries, without realizing its own self-destructive tendencies are propelling the country toward a cliff.
The only solution is a negotiated settlement to work together to save the nation. The throne they are fighting for will have no value if the country collapses. Unfortunately, neither the Prime Minister nor the primary opposition forces (OLA, Fano and TPLF) appear predisposed to such an outcome. The diaspora intellectual class is sadly overdosed and stunted by hermitized and tribalized worldview.
God save Ethiopia from the consequences of the Iran war.
Editor’s Note : Views in the article do not necessarily reflect the views of borkena.com
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