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Investopedia defines a war economy as “an economy of a country at war”. The Eastern Democratic Republic of Congo crisis, the Tigray crisis in Ethiopia, the acts of terrorism in Mozambique following the 2025 elections may tank many countries in the Great Lakes Region into war economies. Of the ten Great Lakes Region riparian countries, the DRC, Rwanda, Burundi, Ethiopia, and Mozambique are exhibiting the defining characteristics of war economies. The March 23 Movement (M23) has upped the stakes in Eastern DRC after capturing Goma and now heading towards Butembo in North Kivu Province as well as taking over Bukavu and advancing to Uvira in South Kivu Province, sparking immense anxiety in Lubumbashi in the south, in Kinshasa and also in Bujumbura (Burundi).
The UPDF’s (Uganda People’s Defence Force) long-standing fight against the Allied Democratic Forces (ADF) in Ituri Province escalated to de facto control of Bunia and Mahagi towns ostensibly to fight the Coopérative pour le développement du Congo (CODECO) Lendu tribe militia that threatens the Bahema tribe. There is a security vacuum in Eastern DRC after the Southern African Development Community (SADC) mission in DRC (SAMIDRC), which replaced the East African Community Regional Force (EACRF) in 2024, withdrew its troops while the Armed Forces of the DRC (FARDC), the Burundi National Defence Force, United Nations Force Intervention Brigade and MONUSCO peacekeepers, the Democratic Forces for the Liberation of Rwanda (FDLR) and Wazalendo militias have retreated or are marooned.
Mozambique is facing ISIS-Mozambique insurgents in the north and violent civil unrest in Maputo after the disputed January 2025 elections. Simmering unrest in the Tigray Region of northern Ethiopia is threatening to spark another Eritrea-Ethiopia war.
When wars and political instability rise, the normal macro-economic assumptions of a well-behaved economy break down, leading to extreme galloping volatility. The highly vulnerable Great Lakes region may unfortunately follow the same path to a war economy observed in fragile and conflict-afflicted states like the Central African Republic, Sudan, South Sudan, Somalia, Ukraine, Libya, Syria, Afghanistan, Iraq, Kuwait, Myanmar, Eritrea, and Yemen. An IMF paper on ”The Economic Impact of Conflicts and the Refugee Crisis in the Middle East and North Africa” posited that war leads to deaths, Internally Displaced Persons (IDPs), destruction of CAPEX infrastructure (roads and bridges , railways, airports, seaports, energy, mobile and internet telecom, water and sanitation), high inflation, GDP recession, rise in fiscal deficit , worsening public debt sustainability and collapse of institutions.
The East African Macro Economic Convergence Criteria sets benchmark thresholds for inflation at 8 per cent (advanced industrial economies set 2 per cent inflation as low and stable), budget deficit at -3 per cent of GDP, public and public-guaranteed debt at 50 per cent and Foreign Exchange Reserves at 4.5 months of imports cover against exogenous external shocks. A current account deficit ceiling of -5 per cent is globally acknowledged by economists. A single-digit ratio of bank non-performing assets to gross loans and lending rates is viewed favourably. Double-digit growth in commercial banks credit to the private sector is perceived to be key to a healthy GDP growth.
Gross Domestic Product (GDP) contraction into a recession or depression has been observed in war economies. A Kiel Institute paper titled ”Economic Fallout: The Price of War” reports that GDP recedes by an average -30 per cent over five years for ground zero war site countries while neighbouring countries suffer -10 per cent contraction over five years. The International Growth Centre (IGC) of the London School of Economics (LSE) estimates that depending on the duration (length and scope), intensity of war, peace conditionalities and pre-war development, GDP per capita contracts by -18 per cent over 4 years.
The IMF’s October 2024 World Economic Outlook Database shows that Ukraine’s real GDP growth contracted by -28.8 per cent in 2022 while belligerent Russia’s contracted by -1.3 per cent as their offensive and counter-offensive attacks heated up. Sudan’s real GDP plummeted to -18.3 per cent in 2023 and to an estimated -20.2 per cent in 2024. This was triggered by the April 2023 civil war pitting Sudan Armed Forces (SAF) against the Rapid Support Forces (RSF). Sudan’s real GDP per capita contracted by US$190, equivalent to a -24 per cent nosedive from US$796 in 2023 to US$606 in 2024. Its neighbour South Sudan suffered a huge -26.4 per cent contraction in real GDP in 2024 as a result of the SAF and RSF war in the capital Khartoum, cutting in February 2024 the pipeline which exports three quarters of South Sudan oil via Port Sudan on the Red Sea.
Civil wars in South Sudan following the country’s independence in 2010 have resulted in extremely serious contraction in the standard of living, with the real GDP per capita plummeting to US$341 in 2024, and to a projected US$469 by 2029 – respectively, 20.5 per cent and 28 per cent of USD$1,660 in 2011.
The Kiel Institute paper further posits that inflation for war site countries rises by 15 per cent and for their neighbours by 5 per cent over a five-year period. A paper titled ”Wartime monetary policy: monetary policy options to adopt during war” observes that central banks consider Bazooka Jumbo hikes of their monetary policy rates to manage both inflation and inflationary expectations. The Second Gulf War (Iraq War) of 2003 to 2011 saw inflation peak at 64.8 per cent in 2006. The Syrian civil war that begun in 2011 drove inflation to 47.7 per cent in 2016. Following the February 2022 invasion of Ukraine by Russia, the IMF’s October 2024 World Economic Outlook report shows that Ukraine’s end-of-period annual inflation rate rose from 10 per cent in 2022 to 26.6 per cent in 2023. This forced the National Bank of Ukraine to raise its key signalling monetary policy rate by a whopping 1500 basis points, from 10 per cent in May 2022 to 25 per cent in June 2022. The Ukraine 1-Year Bond yield jumped dramatically from 15.3 per cent in January 2022 to an extremely high 227 per cent in March 2022, and further to 240.7 per cent in October 2022 as the probability of default risk rose exponentially as the war escalated. It has since fallen to 35 per cent in March 2025.
An IMF paper titled ”The Impact of Conflict and Political Instability on Banking Crises in Developing Countries” found empirical evidence that war is associated with a higher probability of systemic banking and financial services sector risks. The key transmission channels include GDP contraction, elevated Non-Performing Loans (NPLs), plummeting bank deposits and liquidity as customers shift to inflation-resilient assets such as real estate, while war-induced fiscal deficit leads to the private sector being ‘’crowded out’’ of credit as banks freeze credit amidst high NPLs and instead invest in extremely high-yielding treasury securities. Banks themselves get ‘‘crowded out” and disintermediated from deposits as customers prefer government treasury bills and bonds.
A presentation to the IMF titled “Where does Syria Stand?” reported that since the Syrian revolution of March 2011, there had been a steep deceleration in bank deposits and assets while NPLs rose from 5 per cent in 2010 to 35 per cent in 2013. In his paper “What Triggers a Systemic Banking Crisis”, David Beim notes that the banking industry suffered non-performing assets (NPA) highs of 50 per cent, with one commercial bank licence being suspended by the Bank of Sierra Leone (BSL) in 1994 following the outbreak of the Sierra Leone civil war (1991–2002).
The Central African Republic (CAR) civil war that broke out in 2012 after the government failed to honour the CAR Bush War (2004–2007) peace agreements saw non-performing assets rise by 33 per cent following the Seleka coalition of rebel groups take-over of the capital city Bangui that forced former President François Bozizé to flee the country.
The share price of Russia’s largest bank, Sberbank, on the Moscow Exchange (MOEX) fell by a gigantic 58.3 per cent from 249 Rubles on 20 February 2022 to 103.8 Rubles on 9 October 2022 but had recovered to 313.5 Rubles by 23 June 2024. The Russia 5-Year Credit Default Swap (CDS) spreads spiked by 299 per cent from 224 basis points (2.24 per cent) on 31 January 2022 to 894 basis points (8.94 per cent) on 24 February 2022.
The negative effects of wars on foreign exchange rates include depreciation as the Local Currency (LCY) loses value against Foreign Currency (FCY) as demand for FCY to pay for imports, repayments of foreign debt, and repatriation of profits and dividends by foreign companies exceeds supply from exports, tourism receipts, diaspora remittances, Foreign Direct Investment (FDI), and foreign debt (multilateral and bilateral concessional loans from IMF, World Bank and friendly countries, expensive commercial non-concessional debt via syndicated bank loans or Eurobonds). Countries also institute foreign exchange controls rationing how much FCY citizens or companies can have, forbidding FCY bank loans, banning the repatriation of profits and dividends, increasing bureaucracy by requiring Central Bank approvals, and changing from a floating (flexible) exchange rate determined by the market forces of demand and supply to an inconvertible, fixed (pegged) exchange rate. The huge divergence between the official exchange rate printed by the Central Bank and the parallel rates by Forex Bureaux and black markets usually leads Central Banks to devalue their currency to bridge the gap by reducing the parallel market premium. Depreciation and devaluation accelerate capital flight to the safety of FCY-denominated assets (hard currencies like USD, Euro, Swiss Franc, Swedish Kronor, and bonds like the US Treasuries, equities, etc.).
The IMF lists eight different exchange rate regimes that countries may choose. A No Separate Legal Tender is where a country uses an FCY as LCY. Currency Board Arrangements is a fixed exchange rate backed by foreign assets with no room for local Central Bank monetary control. Other Conventional Fixed Peg Arrangements include a fixed rate with the local Central Bank having power for direct market sales or buys, or indirectly via Central Bank Rate hikes or cuts, FX controls and moral suasion. Pegged Exchange Rates within Horizontal Bands involve margins of fluctuations around a fixed central rate. Crawling Pegs is where Central Banks adjust the FX rate in response to changes in selective indicators such as the inflation differentials of major trading partners. Exchange Rates within Crawling Pegs involve upper and lower bands in response to a selective indicator. Managed Floating with No Predetermined Path for the Exchange Rate is where the local Central Bank intervenes directly or indirectly to changes in indicators like Balance of Payments (BOP), Official FX Reserves or parallel FX market developments. Independently Floating is an FX rate determined by market forces of demand and supply with Central Bank interventions restricted to smoothing extreme volatilities.
The Libyan crisis (2011–present) saw a wide divergence of the official rate at Libyan Dinars LYD 1.34 and parallel black market exchange rates at LYD 5.8 against the USD until 3 January 2021 when the Central Bank of Libya (CBL in Tripoli under the Government of National Accord (GNA) in the West, and in Benghazi under the Government of National Stability in Central and Eastern Libya) devalued the currency by 234.3 per cent to LYD 4.48. The Syrian Civil War saw the Syrian Pound (SYP) decline by 20,963 per cent on 18 July 2023 from SYP 47 in March 2011 when the Central Bank of Syria hyper-devalued the currency to SYP 9,900. The SYP depreciated to SYP 13,001 on 22 March 2025, which amounts to 27,562 per cent hyper-depreciation since the start of the war in March 2011.
The Russia Ruble depreciated by 72.5 percent against the USD, from 77 RUB on 9 February 2022 to 132.9 RUB on 11 March 2022 but has since largely recovered to 84.5 RUB on 22 March 2025. The National Bank of Ukraine devalued the Ukrainian Hryvnia (UAH) by 25 per cent against the USD from UAH 29.3 at the beginning of the February 2022 invasion by Russia to UAH 36.6 on 21 July 2022, depreciating to UAH 41.6 on 22 March 2025.
War and the associated sanctions and embargoes worsen regional and global supply chain disruptions which increase merchandise imports, lower merchandise exports while services exports such as air travel and tourism grind to a halt. Net importer countries are overexposed because importers are losers and exporters are winners, more so in the hyper-currency depreciation environment associated with war economies.
The Yemeni civil war began in September 2014 when Iran-backed Houthi insurgents took over the capital Sanaa. In March 2015, a Saudi Arabia-led coalition of nine North African and West Asian countries reinstalled the earlier deposed Yemeni government based in the city of Aden. Yemen’s current account deficit rose to -15.6 per cent of GDP in 2020 and is projected by the IMF to rise to -25 per cent of GDP in 2025. The war disrupted Yemen’s oil and gas industry, which contributes 50 per cent to the Central Bank’s buffering of the official reserves. Consequently, FX reserves plummeted drastically from US$4.4 billion in 2014 – equivalent to 3.1 months of imports cover to US$877.4 million (1.2 months of imports) in 2016. The World Bank’s Yemeni Economic Monitor of spring 2024 shows that the FX Reserves remained below 1.5 months of imports – at US$1.65 billion in 2019, US$970 million in 2020, and US$1.5 billion in 2023.
The 2003–2011 Iraq War was triggered by the 9/11 al-Qaeda attacks on the World Trade Centre Twin Towers in New York and the Pentagon in Virginia. The US accused Iraq of possessing Weapons for Mass Destruction (WMDs), waging chemical warfare against the Kurds, and supporting al-Qaeda. The US responded by leading a coalition with the UK, Australia, and Poland that overthrew the Ba’athist government and captured Saddam Hussein in 2003; he was executed in 2006. Iraq’s current account deficit ratcheted up to -10.7 per cent of GDP in 2003 and -24 per cent of GDP in 2004.
Countries that are at war prioritise the reallocation of the government budget to national security, with a surge in military spending that causes the ‘’crowding out“ of social spending and CAPEX infrastructure investments. The fiscal deficit and LCY borrowing costs may grow as the government increases T-bill and Treasury-bond yields to attract investors. The national debt-to-GDP ratio can rise to levels that worsen the country’s debt sustainability. This could occasion a rapid downgrade of the country’s sovereign rating and eventual default in LCY and FCY debt. The IMF normally swoops in as a balance of payments and budget support lender of last resort but with stringent, painful and politically unpopular economic and governance conditionalities, restrictive covenants and reforms.
Ukraine’s general government net lending/borrowing jumped from -4 per cent of GDP to -15.6 per cent of GDP in 2023 and is projected to reach -19.2 per cent in 2025. Ukraine’s sovereign credit risk rating has taken a huge knock, with its creditworthiness tumbling. The country’s Moody’s rating tanked five levels down from Speculative Grade ‘Highly Speculative of B3’ (Under Review Outlook) with a probability of default of 10.6 per cent on 25 February 2022 to Speculative Grade ‘Very Near to Default of Ca’ (Stable Outlook) with a ratcheted-up probability of default of 32.5 per cent. Ukraine’s Standard and Poor’s (S&P) rating sank from Speculative Grade ‘Highly Speculative of B – ‘(Negative Watch Outlook) with a probability of default of 21.5 per cent on 26 February 2022 to ‘In Default’ (Selective Default – SD) on 2 August 2024. In March 2023, the IMF gave Ukraine US$15.6 billion of the US$115 billion bailout package. The conditionalities include revenue mobilisation interventions, macroeconomic stability (low inflation, FX stability and adequate FX Reserves), central bank independence and financial sector stability.
Benjamin Franklin, one of the founding fathers of the United States, said, “All wars are follies, very expensive and very mischievous ones. In my opinion, there never was a good war or a bad peace. When will mankind be convinced and agree to settle their difficulties by arbitration?“
Peace dividends accrue when countries reallocate military expenditure to social spending in health and education as well as CAPEX infrastructure. In DRC, the influential Catholic and Protestant churches have embarked on national conflict resolution and reconciliation by meeting Corneille Nangaa Yobeluo who leads M23’s political wing, the Alliance Fleuve Congo (AFC), Moïse Katumbi who leads the opposition, President Félix Tshisekedi of DRC, President Paul Kagame of Rwanda, and President William Ruto of Kenya who is the current chair of the EAC. The authorities are making changes in the military while mulling plans for a Government of National Unity (GNU), borrowing a leaf from South Africa’s post-election coalition after the African National Congress (ANC) lost its majority in the 2024 elections.
The Joint SADC and EAC Peace Process merged the EAC-led Nairobi Peace Process (enforced by EACRF) that was led by former Kenyan President Uhuru Kenyatta and the SADC-led Luanda Peace Process (enforced by SAMIDRC) fronted by Angolan President João Lourenço. The joint peace efforts are under the leadership of former Kenyan President Uhuru Kenyatta, the highly respected and seasoned peacekeeper, former Nigerian president General Olusegun Obasanjo, and former Ethiopian Prime Minister Hailemariam Desalegn. EAC and SADC Chiefs of Defence Forces met in Nairobi and passed six directives on ceasefire of hostilities, facilitating humanitarian aid, opening logistic corridors, securing Goma, reopening the Goma International Airport, among other interventions. The United Nations Security Council has called for an immediate end to the M23 offensive in Eastern DRC. Mozambican Armed Forces (FADM), SADC Mission in Mozambique (with counterterrorism mandate) and Rwanda Security Forces (RSF) are fighting ISIS-Mozambique. President Daniel Chapo of the ruling Frelimo party has instituted political dialogue on governance reforms with opposition parties to stem Mozambique’s post-October 2024 elections violence.
