IFIS' ACTIONS IN ETHIOPIA REMAIN IFFY

C O N F I D E N T I A L SECTION 01 OF 05 ADDIS ABABA 003462

SENSITIVE
SIPDIS

DEPARTMENT FOR EEB/IFD, ODF, AF/E, AND AF/EPS
TREASURY FOR REBECCA KLEIN AND STEPHEN ALTHEIM
USAID FOR AFR/EA
TREASURY PLEASE PASS TO WORLD BANK USED OFFICE

E.O. 12958: DECL: 12/05/2017
TAGS: EAID ECON PGOV EFIN PREL IBRD ET
SUBJECT: IFIS' ACTIONS IN ETHIOPIA REMAIN IFFY

REF: A. ADDIS 3422

B. ADDIS 3100

C. ADDIS 2800

D. ADDIS 2254

E. ADDIS 1439

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Classified By: Ambassador Donald Yamamoto for reasons 1.4 (b) and (d).

This is an Action Request; please see para 13.

SUMMARY
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1. (C) As Ethiopia grapples with an increasingly dire
economic crisis its need for financial and development
assistance from international financial and development
institutions (IFIs) is acute. The International Monetary
Fund (IMF) and World Bank (the Bank) have not engaged the
Ethiopian Government (GoE) substantively on the structural
macroeconomic and governance reforms increasingly critical to
Ethiopia's long-term stability and prosperity. The donor
community was taken aback by the IMF's endorsement of what
even its ResRep has called the GoE's "highly dubious"
economic statistics in its own documents in exchange for
gradually expanded access to GoE data and policy-makers. The
Bank and African Development Bank (AfDB),on the other hand,
appear more intent on programming the next funding tranche
than substantively engaging the GoE on, or tying subsequent
funding to performance on, structural reforms.


2. (C) While we have seen a slight change in World
Bank/Ethiopia's position over the past five months from once
condemning "Ethiopessimists" to now at least taking note of
the current crisis, such change does not appear to have yet
translated into the robust dialogue needed to spur reforms.
The United States has put these institutions on notice in
recent weeks through discussions and strong statements at
voting time (Ref. A). The IMF is now developing an emergency
balance of payments (BoP) support package for Ethiopia
through its Exogenous Shocks Facility (ESF). The World Bank
is revising a follow-on project to its flagship Protecting
Basic Services (PBS) program and contemplating a new direct
budget support (DBS) package. As such, now is the time for
U.S. leadership and intensive engagement with the IFIs to
establish with the GoE clear policy reform benchmarks and
underscore that additional funding could be affected unless
Ethiopia introduces the macroeconomic and governance
fundamentals critical to long-term development and
sustainability. End Summary

2005 SET THE TONE
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3. (SBU) The violent and repressive aftermath to the May 2005
national elections set the current tone for GoE-donor
engagement. In response to actions by the GoE severely
limiting political space, major donors including the Bank,
Canada, the UK, Ireland, and European Union withheld DBS from
Ethiopia. Without the support of the U.S., which refrained
from overtly criticizing the GoE's actions, the donors were
able to note their frustration with the GoE, but not able to
leverage adequately their assistance to secure a re-opening
of political space. Facing a stalemate, the Bank, UK, and
other donors devised a scheme of block grants to Ethiopia's
regional governments to fund social service delivery. The
program, known as "Protecting Basic Services" allowed these
donors to save face by diverting DBS, but to continue their
development activities in Ethiopia. In response to the
public criticism of threatening to withhold aid, however, the
GoE severely restricted access by both diplomatic and
development representatives from these countries/institutions
to senior GoE officials for the next year. In the two years
since, donor assistance to meet the humanitarian and
development needs of Africa's second largest population and
the world's seventh least developed country has increased
dramatically. Robust economic growth through late-2007 and a

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strong roll-out of public services gave donors a silver
lining to focus on despite the greatly restricted political
space. Since early 2008, however, the on-set of
hyperinflation, evidence of exaggerated official harvest
figures, and global commodity price increases began to
demonstrate to Ethiopia-watchers that the strong 2004-2008
growth was driven predominantly by external transfers --
accounting for almost 25 percent of GDP -- and the precarious
ideology-driven macroeconomic fundamentals of the statist
economic approach became clearer.

WORLD BANK: PROMISING SAFEGUARDS
--------------


4. (SBU) The World Bank sold PBS to donors by highlighting a
series of transparency and accountability safeguards in the
"component four" social monitoring element of the project.
Under "component four" the GoE agreed not only to open its
books to PBS funders and be subjected to quarterly audits,
but agreed to post financial data about PBS-funded
expenditures at local administration offices for public
review and subject the program to monitoring by domestic and
international civil society organizations. The Bank assured
its Board of Directors that PBS funding would be disbursed in
tranches and only following assurances of full compliance
with all safeguard provisions as evidenced through the
quarterly audits. In a step to maintain pressure on the GoE
following the shift from DBS to PBS, the World Bank also
passed an Interim Country Assistance Strategy (ICAS) in May
2006 in a tepid attempt to exert pressure on the GoE by
indicating that it would not return immediately to business
as usual.

...BUT NOT ABIDING BY THEM...
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5. (SBU) The Bank resumed business as usual within months of
the PBS roll-out. While the GoE has taken tremendous steps
in opening its books to donors and accepting quarterly
audits, progress on the "component four" social monitoring
provisions was significantly delayed by administrative delays
by the Bank for over one year. While the social monitoring
component was designed to produce an indicator of GoE
receptivity to establishing a conducive political environment
of accountability to the public, these delays delayed the
availability of this indicator. Another, more explicit,
indicator of such receptivity was the conduct of the April
2008 local elections and campaign period, in which the GoE
impeded the ability of the opposition to access
constituencies. Without the social monitoring indicator,
willing to accept the GoE's verbal commitment, and unwilling
to halt its flagship program, the Bank's team continued to
authorize subsequent funding tranches without strictly
honoring its accountability safeguards pledge to Executive
Directors. Only in late 2007 did a few pilot social
monitoring woredas (counties) become operational. In May
2008, however, the GoE unveiled a draft Charities and
Societies Proclamation (CSO Law, Ref. B) which imposes
significant prohibitions on foreign-funded NGOs. Despite
pledges by the Bank in the Donor Assistance Group (DAG) --
the local donor coordination body which the Bank co-chairs --
to explore the implications of the CSO Law on PBS, the Bank
has failed to provide such an analysis to date.

... JUST KEEPING THE MONEY FLOWING REGARDLESS OF RESULTS
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6. (SBU) In March 2008 an internal Bank Country Assistance
Evaluation (CAE) assessed that Bank assistance to Ethiopia
from 1998-2006 was "moderately unsatisfactory" particularly
in the governance, accountability, and private sector
development sectors. The CAE argued that outcomes would have
been better had the Bank 1) more candidly recognized
differences with the GoE on key issues of policy, and 2)
ensured a more demanding approach to the governance dialogue.
The report recommended tightening the link between the

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quality of policy dialogue and resource transfers.


7. (SBU) Instead of honoring its own concluding
recommendation, just one month later the Bank loosened the
reins on the Ethiopia program further by approving a full
Country Assistance Strategy (CAS) arguing that the
improvements made by the GoE since 2005 alleviated the
concerns that prompted the more tenuous ICAS. The CAS is
predicated on the fable of a "dual take-off" of economic
productivity and service delivery, but ignores the facts that
both of these are based overwhelmingly on external drivers
and that the GoE has not made the structural reforms needed
to sustain these in the medium-to-long term. In fact, in
discussions with us, neither the Bank or IMF ResReps could
identify indigenous drivers of Ethiopia's economic growth,
instead pointing to the steady growth in foreign transfers
and the luck of good weather conditions resulting in good
harvests -- both of which have taken notable downturns in
recent months. In arguing that transparency and
accountability of basic service delivery by local governments
is the best evidence of Ethiopia's improved governance since
the ICAS, the CAS explicitly hides the fact that the GoE has
refused to implement the very accountability and transparency
measures that the Bank's staff insisted to donors in 2006
would be maintained for the PBS project.

...YET STILL IGNORING THE STRUCTURAL CHALLENGES
-------------- --


8. (C) The end of the Bank's allegiance to Ethiopia only
started to emerge after passage of the CAS, but not before a
series of Op/Eds by the Bank's ResRep in prominent Ethiopian
newspapers late-summer 2008. In these, the ResRep condemned
the "Ethiopessimists" for harping on the country's challenges
and dismissing its advances and opportunities. By November,
however, Ohashi himself adopted the tone of "Ethiopessimism"
in a presentation to donors highlighting the Ethiopian
economic "crisis." Despite on-going GoE-IMF dialogue on an
ESF that would secure strong policy commitments from the GoE
in exchange for BoP support (Ref. C),the Bank unilaterally
presented its own de facto BoP support package to the GoE --
and without consulting donor partners -- under the guise of a
Global Food Crisis Response Program (GFRP). Twice we engaged
the Bank about our concerns over this effort and were told by
the ResRep that it was a fait accompli diversion of funds
diverted solely from previously-approved Bank projects in
Ethiopia, rather than new money (Ref. D). As such, we were
surprised to learn only in early December when the package
was presented to the Bank's Board of Directors that the
package included $137 million in new grants for Ethiopia and
included no commitments from the GoE to address the
structural imbalance that prompted the very need for the BoP
support. Further, despite the GoE internally having accepted
the conditionality required for a full-scope IMF ESF -- as
confirmed to Post by two Cabinet ministers in October and
reported in Ref. C -- the coincidence of this $275 million de
facto BoP support from the Bank helped lead the GoE to reject
the more robust IMF facility with its requirements for
performance on policy reforms, in favor of the unconditioned
Bank support. In discussing this project, the World
Bank/Ethiopia's Chief Economist informed us that the Bank was
"seeing significant progress" in its on-going policy reform
dialogue with the GoE and expressed the Bank's expectation
for this to lead to a Direct Budget Support package from the
Bank for Ethiopia in the coming few months.

IMF: WE'LL SAY ANYTHING TO MAINTAIN ACCESS
--------------


9. (C) With the Ethiopians adamantly opposed to foreign
"direction" of their affairs, the IMF has long been received
coolly in Addis Ababa. In recent years, annual Article IV
consultations have offered the only formal Fund engagement in
Ethiopia, allowing for a gradual building of confidence and
slowly improved access to economic data. Despite
acknowledging Ethiopia's economic growth figures as "highly

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dubious," former IMF ResRep confirmed to us in April that if
the Fund confirms more realistic but lower figures, it would
be "invited to leave" the country. Despite confirming to
donors in May that the Ethiopian economy was growing at
roughly eight percent (Ref. E) and raving of a greatly
improved quality of dialogue, the Fund opened its public
Article IV report in July by echoing the GoE's fabled 11
percent growth figure and announced that it would begin
sending two Missions to Ethiopia annually. The 11 percent
figure was later repeated by the Economist Intelligence Unit
and has served as a frequent point of inquiry raised by
American investors looking for potential openings but
confused by their findings in country. Additionally, based
on verbal assurances by state-owned enterprises (SOEs),the
Fund internally reported a debt-to-exports ratio of 125
percent, putting the country at stable-to-moderate risk.


10. (SBU) Since the IMF's May Mission, Ethiopia's persistent
hard currency crunch has led the GoE to pursue a modest ESF
BoP loan from the Fund. In contrast to the GoE's propensity,
the IMF reported to us on December 11 that the GoE has agreed
to deposit a letter of policy intent with the Fund in
exchange for a $50 million loan. Despite statements to us by
the Trade Minister and Economic Advisor to the Prime Minister
in early October that Ethiopia was prepared to accept a $200
million facility or "as much as the Fund is willing to give
us," the coincidence of the ESF with the Bank's de facto BoP
loan through the GFRP, appears to have convinced the GoE that
it did not have to sign on to the larger $150 million ESF
facility which would have conditioned the second tranche of
the loan on the GoE's follow-through in implementing the
pledged reforms. According to the Fund, in exchange for the
$50 million ESF facility, the GoE has pledged to: 1)
eliminate all government borrowing, 2) eliminate domestic
fuel subsidies, 3) increase tracking of SOE resources by the
Finance Ministry, and 4) keep the growth of money supply
under 20 percent per year. The Fund acknowledged that point
1 above will force the GoE to shift much more of its
activities off-budget to SOEs. Still, they reported having
received a pledge that the GoE will restrict SOE borrowing to
4-8 billion Birr (roughly $400,000-$800,000, or two percent
of GDP).


11. (SBU) The Fund assessed that the Ethiopian Birr is
roughly 40 percent overvalued, called the financial sector a
"black box" into which they had gleaned no insights, and
reported that clarifications on SOE debt since July actually
put the debt-to-exports ratio at around 140 percent -- well
into the moderate risk, and near the high risk, zone for debt
distress that triggers restrictions on some donors' approvals
of further loans to the country. Visiting team lead Robert
Corker stated that the team was "pleased with the
government's policy commitments, yet anxious about the
situation." Instead of noting the need for the GoE to
address its mis-aligned macroeconomic fundamentals, Corker
noted that the GoE was "slow on the structural side of
things" and urged donors, especially the World Bank and AfDB,
to follow through with the over $750 million in pledged
assistance to Ethiopia this fiscal year lest dire economic
consequences emerge. In response to our query whether the
GoE had a strategy to address the structural problems that
they have acknowledged to us as having (Ref. C),shockingly
Corker admitted that the Fund's team, which had been planning
this visit since May "did not discuss the structural issues
with the government" on this visit but highlighted that the
Fund had "given the government lots of advice and analysis of
the issues over the years."

FINAL COMMENT
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12. (C) As the IMF mission team leader highlighted, the World
Bank and AfDB are the largest donors in Ethiopia and those
whose support the GoE most needs. Still, the actions of the
multilateral development banks to date has demonstrated a
wholesale willingness to 1) ignore the GoE's performance

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record, 2) accept the most basic government assurances in
order to keep their funding flowing, and 3) forego any truly
robust dialogue on reforms with the GoE despite the negative
impacts of the fundamental structural imbalances on
medium-to-long term sustainability in economic growth or
development. For its part, the IMF has lent credibility to
the GoE's inflated growth figures while forfeiting its own
responsibility to raise, much less insist on, sound
macroeconomic policies. Having written off over $4 billion
in Ethiopia's multilateral debt in recent years, the IFIs
have turned a blind eye while the country has re-acquired
almost all of it back -- largely from China -- and taken no
action to prevent the continuation thereof. If we are going
to help Ethiopia make the tough decisions needed to get its
economic house in order to ensure better long term
development and growth, the U.S. will have to take a
leadership role vis-a-vis the IFIs' approach to Ethiopia now.

ACTION REQUEST
--------------


13. (C) The abstention votes by the U.S. Executive Director
to the Bank on both PBS votes to date have attracted the
attention of the GoE (Ref. A),but not yet the Bank itself.
Our engagements with the Bank and Fund in early December
around the ESF and GFRP have now put them on notice that the
USG will look to both institutions, as well as the AfDB, to
engage in a more robust policy dialogue with the GoE. Post
has begun to engage the Bank staff locally much more on
looming programs and will make clear USG expectations that
new money into Ethiopia be approached only when the broader
GoE policies are in place to ensure longer-term success. We
strongly encourage full interagency concurrence as well as
support for the Department of Treasury and the U.S. Executive
Directors (EDs) assigned to the Bank, Fund, and AfDB to begin
conveying to each institution's Ethiopia team and other EDs
the expectation that future assistance packages be
accompanied by the appropriate reforms or commitments by the
Ethiopian government to ensure the longer-term viability and
sustainability of the project. We further urge these USG
representatives to affirm to these institutions that
decisions on U.S. votes on future assistance packages will be
predicated on the performance of past assistance and the
GoE's follow-through and implementation of the pledges that
it made in connection to past assistance.


14. (C) This Mission has, and will continue to, discuss and
coordinate with the donor group and with the GoE our position
on benchmarks and a results-oriented approach to economic
development in Ethiopia. In this context, we also recommend
that USG agencies advocate the critical importance of other
donor nations and the IFIs to coordinate positions with the
USG on this approach. We do not achieve our goal nor support
Ethiopia's goal of sustainable economic growth by
perpetuating Ethiopia's cycle of poverty and aid dependence
through continued band-aid style bail-outs without clear
support for benchmarks agreed to by, and coordinated with,
the GoE and donor community. As a strategic partner, we owe
it to the Ethiopian people to help bring about the reforms
necessary for Ethiopia to achieve the development and strong
growth it both needs and desires. End Comment.
YAMAMOTO