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
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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
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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
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
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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
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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