Ethiopia - Eritrea Border Conflict: The Role Nakfa Played

BY HAILESELASSIE GIRMAY

Vol.1, Issue 2

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Oh, Nakfa you are an indefatigable grave digger
First for the enemy
And now the defender,
The instability you suffer I did hear
But your stolidity in your children that you now bear
I dare say but that you are a double dealer.
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Ethiopia braced itself for coming to terms with the past and began taking steps to heal the
wounds inflicted on it and live in peace and harmony with its new found neighbour. It can
be argued that no nation in the world has made such a transition as Ethiopia, taking into
consideration the historical context of the conflict. In addition, no nation has extended an
all round assistance as Ethiopiadid to a breakaway entity which had much in common with
the one with whom it wantedto sever links. Taking all these factors into consideration one
would then be obliged to ask why a nation which went an extra mile to help Eritrea stand on
its feet after the initial conflict was over, wanted to go to war with it? Would fighting over a
small area (Badme), become more significant than giving up Eritrea proper, which Ethiopia
had already done?

It makes no sense. It only makes sense if one is prepared to accept that Badme, Zalambessa
and Alitena, leaving aside the issue of potential or actual economic use of the regions, have
never been administered as part of Eritrea by the Italians. The Italians might have had maps,
indeed they had many maps now displayed by the the Eritrean government as evidence for
claiming these regions. But for all we know, they may even have had other maps they show
the world apportioned between the Triple Entete, Germany, Italy and Japan. It is not surprising
and you cannot blame them for entertaining covetous and expansionist dreams, for they were
colonisers bent on trampling other peoples sovereignty.

Any nation whose territory is invaded will rise to defend its sovereignty. As can be seen, the
burden on the Ethiopian government to mobilise every able citizen to defend the country is
virtually made light, for the people do not need any convincing or cajoling to sacrifice their
lives, when the nations integrity is called into question. Casualties, loss of assets and the
destruction of the environment make the people more determined to fight and expel an
aggressor rather than being intimidated or feeling gloomy about the prospect. That is what
is being witnessed in Ethiopia today. The Eritrean government anticipated that the state
structure and the unity of the people would fracture and go to pieces. However, this turns
out to be a miscalculation and the calculators would learn their lessons fast but at a price.

Now let us examine the situation from the Eritrean side. Why would Eritrea want war with
Ethiopiaafter 30 years of arduous and precarious struggle for independence? The nationhood
of Eritrea has been recognised and assured by Ethiopia. Half a million Eritreans, enjoying
equal status with the rest of Ethiopians, even though 130,000 of them opted to participate in
an affirmative referendum for independence, are still regarded as one of them by the Ethiopians.
Cognisant that the shared economic and social benefits Eritreans draw from the entire length
and breadth of Ethiopia by far exceeds that which could be obtained from the invaded area.
Even if all Ethiopians from the invaded areas were to be uprooted and thereby it became an
exclusive Eritrean habitat, one finds the logic for going to war by the Eritrean enigmatic to say
the least. Why would the Eritrean government want to risk the independence and peace of its
citizens for a perceived benefit that was there in the first place, courtesy of the Ethiopian
people? For pride and defence of sovereignty? But the land invaded has never been part of
Eritrea even under the administration of the colonial powers. No, it makes no sense.
Then what might be the real causes for such cowboy and cavalier attitudes towards a friendly
neighbouring nation where social, economic, cultural and psychological links are still strong?
What swashbuckler and halter-scatter attitude is this, to put at risk ones own independence?

This leads us to believe that the real causes of the invasion were avoidable policy errors of
Eritrea’s own making. To take the former case first, most Eritreans before and after
independence had legitimate monetary assets in Birr. It goes without saying that the
Eritreans could do whatever they wished with their liquid assets.

However, after independence, many Eritreans, especially those who used to live abroad and
who had little or no monetary assets of their own moved to Ethiopia and began to run
businesses worth thousands and even millions of dollars. This leaves one to suspect the source
of their newly acquired riches and speculate whether they may have been put in as front men
and women for big organisations such as the EPLF, to fill its coffers and dominate the market
at the expense of the Ethiopian business community. One could also argue that other Eritreans
living in Ethiopia who were already well off prior to independence also did manage to get soft
loans from Ethiopian banks, yet again for the purpose of dominating the market and
accumulating Ethiopian monetary assets for a hidden purpose.

Moreover there are grounds for believing that Eritrean banks used their consumers deposits to
purchase without even keeping aside the minimum required liquid assets and bank ratios, as
all prudent banks must do in order to meet the demand for cash by customers against their
accounts - tradable goods such as coffee, hides and skins, oil seeds, gold via their front men
and women. This was then resold abroad to earn much needed foreign currency. The banks
were also involved in exchanging the Birr for hard currency at a cheaper rate in Eritrea compared
to the going rate set by market forces in Ethiopia. Such racketeering continued for almost seven
years until Eritrean banks were left dried up of Birr holdings and found themselves reaching a
critical point whereby they were unable to pay their customers cash on demand against their
account at the counters. Also the Eritrean government was faced with bottlenecks in paying
salaries for employees with Birr and short of cash to buy goods and services for government
related productive and non productive consumption.

The decision by the Eritrean government to introduce a new currency- the Nakfa was so
sudden and its execution became apparent when one observed that at the end of the currency
conversion - that is when all Eritrean bank customers got their Nakfa in return for the Birr they
had initially deposited - out of the officially estimated circulation of 44 Billion Birr, (without
taking into consideration the unofficial supply of Birr of unlimited sums that the Eritreans
managed to wangle from Ethiopia) only an equivalent of two hundred million dollar old Birr were
left unconverted to either the new Birr or other hard currencies. This sum was then finally
presented by the Eritrean authority to the Ethiopian government for replacement, possibly in
hard currency, for which the Ethiopian government declined to oblige. Shortage of the Birr
contributed to malfunctioning of the government, hence the necessity for introducing the new
currency - Nakfa. The Eritrean method of doing business appeared to be well designed to kill
two birds with one stone. Eritrean bank depositors got their newly issued currency and to allay
fears that Nakfa is unstable, it was declared to have equal value with the Birr. By then the
Eritrean government has accumulated enough dollars, gold and other hard currencies by
finagling from Ethiopia to help launch and back the new currency and set aside a foreign
currency reserve virtually from nothing. We know for sure that on the eve of independence,
Eritrea had little or no gold and foreign currency to back the printing of a new currency. At
this stage it has to be stated that no new currency can be launched without having gold or
leading currencies to defend its value and sustain its validity.

However, many nations, let alone Eritrea, have a limited foreign currency reserve and therefore
cannot carry on indefinitely defending their local currency in the face of economic crisis. Sooner
or later they will exhaust their reserves and their local currencies will start to free fall. Thus the
safest way to maintain or increase the value (if this is seen as desirable) of a domestic currency
is to produce or extract tradable products at similar or lower cost than similar commodities
produced by other countries. The trouble is, Eritrea produces little or no products at similar or
lower cost than Ethiopia. Also Ethiopia has little need for the products of Eritrea while the
opposite is the case for Eritrea. Consequently, as the supply of Nakfa outstripped the demand
for it, its value started to go down faster than expected. When this happened, many unforeseen
things started to occur. One thing is for sure, Eritreans felt betrayed by their government as the
Nakfa started to free fall. To seal off the abyss, despite their claim to adhere to a free market
economy, the Eritrean government put their case to the Ethiopian government that the Nakfa and
the Birr should have irrevocable par values and should be indistinguishably used in both lands.
While at the same time they demanded that the two currencies, inseparable as they are, should
be allowed to free floatagainst other currencies. This was planned mainly because the Eritrean
economy was perceived to be outward looking, whilst the irrevocably locked relation between the
two currencies would give Nakfa stability and prevent threats from the Birr while selling to or
buying goods and services from Ethiopia. Free floating against other currencies, the Nakfa would
give Eritrea a competitive edge in the International, but mainly Middle East and East African,
markets which Eritrea hoped to dominate.

The refusal of the Ethiopian government to agree to the plan and foot the bill led to immediate
and aggravated tension between the two nations, as Eritrea’s dream of achieving not only
political but also economic independence at the expense of Ethiopia was called into question.
Again a point to remember is that for a nation to be completely independent it requires the
establishment of its own monetary authority which decides on matters related to the supply
of money, interest and exchange rates, without which not much can be said about the fruits
of the thirty years of struggle. It is the pursuit of complete independence hotly, and perhaps
legitimately sought for nearly forty years, that has now, ironically, posed intractable problems
for the Eritreans.

Now going back to the beginning, if the Eritreans were amassing more than their fair
proportion of the Birr through state-sponsored racketeering, one would then be compelled to
ask why would they then choose, as they did, to sever their links with the Birr and create a
new currency? As has already been discussed above, the main reason was their shortage of
cash (Birr) to conduct public and private economic and business activities. However, coupled
with this it can be argued that there was this insatiable desire on their part to create their own
currency so that the political independence they achieved could have a real meaning. However,
once independence proper was achieved in the battle field, the Eritreans faced new problems
for which they were either ill-prepared or which they never anticipated.

Theoretically, it is feasible for a nation to create its own currency without having to bother about
gold or foreign currency reserves as long as it is self- sufficient and relies on internal trade
between its citizens. However, to be able to do so it requires the nation to be big and endowed
with agricultural, natural, industrial and skilled human resources for it to produce and
manufacture goods and services at competitive costs so as to stave off other nations from
penetrating its market and put a stop to temptation of its own population to look for products
from other nations. But this may lead to a catch 22 situation. Being competitive may lead to
the opening up of export opportunities for the nation’s products and services, to be desired by
others wanting to purchase them, hence linking it with the rest of the world. Such opening up
of export opportunities may be difficult to stop unless the nation, by way of isolationist policy,
erects barriers to imports.

Eritrea however is a small country, both in terms of size and population, and with little or no
resource base of its own for primary, secondary and tertiary developments. In fact, Eritrea
depends on others, mainly Ethiopia, for its raw materials and markets for its low-tech, finished
and semi-finished industrial goods. The creation of the new currency (Nakfa) and the problem
of its convertibility had blocked the flow of goods and services between the two countries before
the Badme conflict.

For Eritrea, being small and, unlike Djibouti, with no one to bail it out of difficulties, the single-
minded pursuit of Independence may have posed new and insurmountable problems. But one
may be tempted to ask why should there be problems? It is true to a certain extent that under
colonial rule Eritrea had a taste of nationhood and going it alone. This is true to a certain extent.
Italy governed Eritrea, then the British were in charge, and they more or less saw to it that
Eritrea was an adjunct to the colonial stepmother. In addition, there was a period when the gap
between the developed and less developed was only yards away. It was a time when cars like
Morris were the fastest contraptions which people desired to own for only $400.00. The revenue
from a truckload of oranges exported was good enough to be traded in exchange for the deluxe
and enjoyable ride. Also Eritrea, small as it is, was green where people managed to produce
what they needed and arguably the service of Morris was happily substituted by alternative
and affordable locally made gigs and hansoms.

Forty years later they received their independence. However, the gap between the developed
and less developed had widened astronomically. Today, not only a truck full of oranges but the
whole harvest of oranges of the nation is barely enough to purchase the latest ‘Morris’. Likewise
the land has been turned into an arid or semiarid enclosure where human beings have little or
no means of survival. This, is exacerbated by the fact that what little the people manage to
produce cannot be sold, and goods purchased across the border are unaffordable because of
the introduction and inconvertibility of the new currency.

The Government of Ethiopia has rejected the use of Nakfa at par value with the Birr and
as a medium of exchange inside Ethiopia, and rightly so for one simple reason. Even if the
use of the two currencies were to be agreed at invariable par value without distinction, it
would have been convenient to operate the two economies with a single currency, mainly
the Birr because of its age, familiarity and people’s confidence. Any plan for having a second
currency, apart from sentimental reasons, becomes redundant and ought not to have been
considered except for ulterior motives. If two nations are to operate with two currencies
invariably at par values and yet each country independently prints its own currency who
knows how much of it is printed and dumped on the other country leading to unmanageable
economic chaos apart from the other problems mentioned above. To maintain Eritrean
independence proper and keep the Nakfa afloat, the threat from the big and stronger economy
of Ethiopia and the strength of the Birr have to be dealt with.

It seems Eritrea could not possibly and feasibly co-exist side by side with the bigger nation
with the threat of being dominated hanging over its head. However, the Eritrean government
miscalculated the weakness of Ethiopia’s internal political structure and hoped to exploit,
weaken and to fracture the country, if Eritrea and the Nakfa were to have their own way in the
region. Hence Eritrea declared this war of aggression followed by aerial bombardment upon
unsuspecting school children, some of whose parents had fought alongside the same Eritreans
in the struggle for independence. But war is a cruel and terrible game to play, which Eritrea
knows all too well. Any nation that has gone through a long and destructive war is aware that
it takes the duration of the life of those involved to get the scars out of their system. Even if
economic problems are overcome it will be an unhappy nation for a long time, saddled with
depression for loss of loved ones. In a long-drawn out war nearly every household is affected.
Besides, although no one for sure can tell the outcome of this war, in this case Eritrea appears
to be on the losing side. It has no just cause and arguably it has fewer resources than its
adversary. It is time that the Eritrean government realised this and woke up before it is too late.