ETHIOPIA'S ECONOMIC SCRAMBLE FURTHER STIFLES PRIVATE

UNCLAS SECTION 01 OF 02 ADDIS ABABA 001200 SIPDIS SENSITIVE DEPARTMENT FOR EEB/IFD/OMA - JWINKLER AND EEB/CBA - DWINSTEAD DEPARTMENT PASS TO U.S. PATENT AND TRADEMARK OFFICE - AMY COTTON USTR FOR PATRICK COLEMAN, CECILIA KLEIN, AND BARBARA GRYNIEWWICZ DEPT OF COMMERCE WASHDC FOR ITA BECKY ERKUL DEPT OF TREASURY WASHDC FOR REBECCA KLEIN E.O. 12958: N/A TAGS: BEXP ECON EFIN ETRD EINV EAGR ET SUBJECT: ETHIOPIA'S ECONOMIC SCRAMBLE FURTHER STIFLES PRIVATE SECTOR REF: ADDIS ABABA 1015 ADDIS ABAB 00001200 001.2 OF 002 SENSITIVE BUT UNCLASSIFIED; BUSINESS PROPREITARY INFORMATION; NOT FOR INTERNET DISTRIBUTION SUMMARY -------------- ¶1. (SBU) In hurried efforts to stabilize the economy, the Government of Ethiopia (GoE) has implemented policies that are destabilizing the private sector and investment climate. Ethiopia has been trying to rein in the money supply, increase government revenue, and boost ailing foreign exchange reserves. As an apparent part of these efforts, GoE officials are confiscating "excess" hard currency and Ethiopian Birr from travelers departing the airport and repeatedly shaking down local businesses for tax payments they supposedly owe. In the scariest turn of events, a British diplomat and another European were reportedly beaten up at the airport after refusing to hand over their cash. The GoE has also taken on more formal measures in this effort to include instructing all banks to cease the acceptance of duty-free imported goods as loan collateral and to freeze all lending at current outstanding loan amounts. Additionally, foreign companies are facing significant delay in their repatriation of profits as the central bank is not allocating enough hard currency to this process (reftel). These GoE actions are stifling private sector growth in an already tough business climate. We assess that these restrictions will only deter desperately needed foreign investment. END SUMMARY. DESPERATE TIMES CALL FOR DESPERATE MEASURES -------------- ¶2. (SBU) Ethiopia's hasty approach to increase government revenue, boost foreign exchange reserves, and stem inflation appears to ignore long-term consequences. For example, airport customs officials recently began a trend of confiscating any "excess" hard currency and Ethiopian Birr from departing travelers. While the law prohibits taking more than USD 1000 without documentation of its origin and 200 Birr (USD 18) out of the country, this provision has long been ignored and airport officials have implemented it �A;inconsistently. Approximately seven U.S. Citizens have complained to post's Consular Section about excess cash seizures at the airport. In the most disturbing news to date, in two separate incidents, a British diplomat and another European were recently beaten up at the airport for refusing to hand over their excess cash. According to Embassy sources, the British Diplomat was carrying USD 5000. It is unclear how much foreign currency was involved in the other incident or ultimately what type of injuries, if any, the travelers sustained from these alleged beatings. ¶3. (SBU) On the business front, numerous local companies have reported to EconOffs that government officials from the Ethiopian Revenue and Customs Authority have repeatedly approached them stating that they owe additional taxes -- sometimes several years old -- despite presenting previously accepted audited financial statements. It appears that companies paid their proper taxes and then the government keeps coming back to them saying they owe more and more based on little evidence. For example, one local technology company reported to EconOff that the government informed it of about USD 30,000 in penalties and back taxes it owed for transactions that occurred two years ago. Its justification for these back taxes appears to be based on transactions such as a computer that was sold at a 20% markup; however, the government now states that the company should have paid the tax on a 40% markup because that was more in line with the market price. In addition, local companies informed EconOff that if companies protest this kind of "revaluation," the official would sometimes offer to let them pay a reduced amount if they agree to pay immediately. BANKS ORDERED TO RESTRICT LENDING -------------- ¶4. (U) On a more formal basis, the Ethiopian Revenue and Customs Authority issued a directive to all commercial banks to prohibit imported duty-free goods from being used as loan collateral and to collect immediately all loans issued under this duty-free incentive. ADDIS ABAB 00001200 002.2 OF 002 This directive was aimed at tightening the money supply and reducing inflation, but also ended up severely limiting the financing options of foreign-owned businesses and long-term investors. Ethiopia affords Ethiopian Diaspora investors and exporters duty-free imports of machinery, vehicles, computers, appliances, etc. and many valuable assets have been imported under this duty-free incentive. In the past, investors jumpstarted their new Ethiopian business or expanded current business by extending their line of credit with local banks. Now, however, investors will be short on cash flow, as they will be forced to repay their previous obligations and not be able to use these duty-free imported assets as collateral for additional loans. ¶5. (U) In other belt-tightening measures, the National Bank of Ethiopia (NBE, Ethiopia's central bank) issued a directive to all commercial banks on April 24 not to exceed current outstanding loan amounts. Therefore, it has become extremely difficult for a business that has qualifying collateral to receive additional funds. The only scenario whereby a bank could extend a new loan is if the company or other clients have repaid a previous loan. This lack of access to finance makes it nearly impossible for the private sector to grow and take on new endeavors. In a final blow to foreign investors, the NBE is not allocating enough hard currency to banks to honor profit repatriation obligations (reftel). Those foreign companies that want to get their money out are legally able to do so, but unable to do so in practice without significant or indefinite delay. COMMENT: BAD INVESTMENT CLIMATE GETS WORSE -------------- ¶6. (SBU) The GoE surely has serious economic concerns to address; however, in the midst of economic chaos their actions are further stifling the private sector. The private sector could contribute solutions to Ethiopia's economic challenges, but instead is facing roadblock after roadblock to increasing growth and strength. These GoE actions add to the already difficult challenges businesses deal with in regards to telecommunications services, power supply, transport logistics, government preferences for state- and party-owned enterprises, and historical government regulation. How much more can investors take? The Ethiopian Diaspora has an emotional tie to Ethiopia as a marketplace, but other foreign investors do not. In concert with other donors, we will continue to encourage the GoE to take a second look at these types of policies and realize their negative impact on potential foreign investment as well as the local private sector as a whole. YAMAMOTO