Ethiopia's war with neighbouring Eritrea has had a devastating effect on the economy of what was already one of the poorest countries in the world, according to a new report.

The study, by the Ethiopian Economic Policy Research Institute, says the two and a half year border war cost Ethiopia more than $2.9bn.

It states the economic and social infrastructures were destroyed, properties were looted and normal human settlement and economic activities were disrupted with a significant loss of life.

The BBC has obtained a copy of the report which says when the war broke out on 6 May, 1998, the Ethiopian Government was forced to mobilise manpower, material and financial resources to help with the war effort.

"To defend the nation, the size of the army was increased from 60,000 to 350,000. The increase in the size of the army increased the defence expenditure from $95m in 1997/8 to $777m in 1999/2000. Thus the military expenditure became 49.8% of the country's total recurrent expenditure," says the report's author, economist Abebe Teferi.

The report concludes: "The high growth rate and increase in the military expenditure has led to an increase in budgetary deficit; an increase in domestic borrowing; an increased gap of balance of payment; a constraint in foreign exchange allocation for import; and a reduction in spending in other sectors."

Human cost

One of the fundamental impacts of the conflict was the mass displacement of up to 350,000 people who lived in the conflict region.

"The internally displaced people, in addition to their displacement, have lost their properties including livestock, stored grains, production tools, household utensils. Their residential homes have been either destroyed by heavy artillery or set on fire. In addition, some social infrastructure such as education, health, water supply and animal health facilities have been destroyed or damaged. There has also been destruction and damage to commercial enterprises such as flour mills, flour factories, hotels, bakeries and poultry farms".

"Roads and bridges have been heavily destroyed or damaged both in the war affected areas as well as certain other parts of the country due to additional heavy traffic movement to serve the war front. Power supply infrastructure has also been with destroyed or damaged in war affected areas. The estimated cost of destroyed public and social infrastructure is well over $200m."

According to the Ethiopian Investment Authority (EIA), there were 217 investment projects owned by foreign companies which were being approved before the war erupted.

Even though the war ended in December 2000, only 47 projects are operational.

The EIA also states that although 13,700 domestic companies were interested in investing prior to the war, only 1,467 projects are operational.

The report states: "Thus investment by foreign companies during 1998/99 and 1999/2000 has dropped by 790.1% and 813.2% respectively. In spite of the government's effort to attract foreign investors, it seems that potential investors have adopted a wait-and-see attitude until the peace agreement between Ethiopia and Eritrea is full operational."

Tourist trade

Tourism, which was growing at a significant rate and had totalled 111,371 visitors in 1996/7 was badly affected by the outbreak of the conflict.

The influx of tourists declined to 90,847 in 1998 and therefore reduced Ethiopia's foreign exchange earnings and loss of income for hotel owners, air transport, travel agents and tour operators.

According to the report one of biggest losses to the country was the reduction of external aid.

However, when the conflict began the international community froze or suspended new development assistance.

Consequently, the annual average donation to the country declined from $700m to $500m.

The cessation of trade and economic relations between Ethiopia and Eritrea when the war began also resulted in a large financial loss for Ethiopia.

The exports of specific commodities like teff (cereal) and berberi (hot chilli) to Eritrea was disrupted at a substantial loss to Ethiopia.

As the border war continued, Ethiopian properties which had a value of $133.3m were looted at the Eritrean ports of Massawa and Assab.

These are just some of the main costs of the conflict, but the report also cites the money owed to Ethiopian banks by deported Eritreans and the impact of the transfer of a productive workforce of young men from professional jobs into the army.

However, despite the fact that private investment, foreign trade, level of external aid and gross domestic saving declined because of the war, Ethiopia's GDP registered a reasonable growth rate of 5% in 1999/2000.

Although the report's author emphasises that most of the research was based on secondary data and that further research needs to be done, the statistics quoted are likely to shock most Ethiopians who supported the conflict.