Three years after the 2022 Pretoria Agreement formally ended large-scale hostilities in northern Ethiopia, the Horn of Africa is entering a new phase of instability one defined not by open conflict, but by quiet rearmament and proxy positioning.
According to multiple security assessments, including warnings from the International Crisis Group in early 2026, tensions between Ethiopian federal forces, Tigrayan factions, and Eritrean military interests are resurfacing beneath a surface-level political calm. The absence of public escalation has masked a more complex reality: rival groups are reconstituting capabilities, while regional actors are repositioning for strategic advantage.
The result is a fragile equilibrium with significant economic implications.
From Ceasefire to Fragmentation
The Pretoria Agreement was designed to end a devastating conflict that had already imposed severe economic costs on Ethiopia and the broader region. However, the post-agreement environment has produced fragmentation rather than consolidation.
On one side, remnants of the Tigray People’s Liberation Front (TPLF) continue to maintain influence, while alternative forces aligned more closely with Addis Ababa have begun to emerge. This internal division has created a proxy dynamic within Tigray itself.
At the same time, Eritrea whose military played a decisive role during the conflict has not fully disengaged from the region’s security architecture. Reports of discreet military positioning, including activity linked to ports such as Assab and Djibouti corridors, suggest a continued strategic presence.
This layered conflict structure increases the risk of escalation without clear lines of accountability.
Defense Spending and Economic Trade-Offs
Military expenditure provides a measurable lens through which to assess the economic burden of rising tensions. Ethiopia, one of Africa’s largest economies, has historically allocated significant resources to defense, with spending estimated at approximately $1 billion annually in recent years, according to Stockholm International Peace Research Institute (SIPRI) data.
Eritrea, while operating on a smaller economic base, maintains one of the most militarized societies in the region, with a high proportion of national resources directed toward defense and national service.
These allocations carry opportunity costs:
• Reduced fiscal space for infrastructure and social investment
• Increased pressure on public finances
• Lower capital allocation to productive sectors
The IMF has consistently emphasized that elevated defense spending in developing economies can crowd out growth-enhancing expenditures, particularly when fiscal resources are already constrained.
In the context of Ethiopia and Eritrea, the trade-off is particularly acute given ongoing development needs and external debt pressures.
Proxy Dynamics and Regional Spillover Risk
The re-emergence of proxy dynamics introduces a new layer of complexity. Unlike conventional interstate conflict, proxy engagements allow governments to exert influence while limiting direct confrontation.
However, this approach carries its own risks. Fragmented armed groups are more difficult to control, increasing the احتمال of localized clashes escalating into broader conflict.
Regional actors are also becoming more involved. Egypt’s strategic interest in the Nile Basin, particularly in relation to Ethiopia’s Grand Ethiopian Renaissance Dam (GERD), adds a geopolitical dimension to the situation. Control over water resources intersects with broader security concerns, linking inland tensions to Red Sea maritime dynamics.
This interconnectedness means that a localized escalation could have wider implications across the Horn of Africa.
Economic Impact: Trade, Investment, and Growth
The economic consequences of renewed instability are not confined to defense budgets. Conflict or even the credible risk of conflict affects multiple layers of economic activity.
First, trade routes are directly impacted. The Horn of Africa serves as a critical corridor for regional and international trade, with access to Red Sea shipping lanes playing a central role. Disruptions or perceived risks can increase insurance costs, delay shipments, and reduce trade volumes.
Second, investor confidence declines. Political and security instability increases risk premiums, discouraging both foreign direct investment and domestic capital formation.
Third, currency and fiscal stability come under pressure. Governments facing security challenges may increase borrowing to finance defense spending, contributing to currency depreciation and inflation.
The World Bank has noted that countries experiencing conflict or instability tend to see significantly lower growth rates compared to stable peers, with long-term effects on income levels and development outcomes.
The Cost of War with Neighbors
Interstate and cross-border tensions in Africa often produce outcomes that extend beyond immediate military objectives. Conflict between neighboring countries disrupts regional integration efforts, undermines trade agreements, and diverts resources away from development.
For Ethiopia and Eritrea, the economic cost of renewed conflict would likely include:
• Reduced export capacity due to logistical disruptions
• Increased fiscal deficits driven by defense spending
• Slower progress on infrastructure and industrial projects
These effects are compounded by the interconnected nature of regional economies. Instability in one country can quickly spill over into neighboring markets, affecting supply chains and economic performance across borders.
In this sense, the cost of conflict is not localized it is systemic.
Diplomatic Silence and Strategic Calculation
One of the most notable aspects of the current situation is the relative absence of public diplomatic confrontation. Leaders in Ethiopia and Eritrea have largely avoided escalatory rhetoric, while regional organizations have maintained a cautious stance.
This silence may reflect a strategic calculation: open escalation carries immediate economic and political costs, while quiet positioning allows for flexibility.
However, this approach also reduces transparency, making it more difficult for markets, investors, and policymakers to assess risk accurately.
The absence of visible conflict does not equate to stability it may instead indicate a transition to a different form of competition.
Structural Outlook: A Region at an Inflection Point
The Horn of Africa is at a critical juncture. The post-Pretoria environment has created an opportunity for reconstruction and economic recovery, but also a risk of renewed fragmentation.
The trajectory will depend on whether regional actors prioritize economic integration and development over strategic competition and proxy conflict.
The stakes are high. The Horn’s position at the intersection of major trade routes, combined with its role in key geopolitical issues such as water security and Red Sea access, means that instability could have continent-wide implications.
The central question is not whether tensions exist they clearly do. It is whether they will translate into open conflict, and if so, whether the region’s economies can absorb the resulting shock.
For now, the peace holds. But beneath the surface, the foundations are being tested.
