ETHIOPIA: ECONOMIC HIGHLIGHTS MAY 2009

UNCLAS SECTION 01 OF 02 ADDIS ABABA 001276 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: ECONOMIC HIGHLIGHTS MAY 2009 REF: ADDIS ABABA 780 ADDIS ABAB 00001276 001.2 OF 002 SENSITIVE BUT UNCLASSIFIED; NOT FOR INTERNET DISTRIBUTION ¶1. (SBU) SUMMARY: This cable provides a summary of recent economic highlights in Ethiopia, including: 1) decreasing inflation rates; 2) expected depreciation of the Birr; 3) declining export performance; and 4) factory stoppages due to increasing power supply rationing. Annual Consumer Price Index (CPI) inflation declined to 23.3 percent in April 2009 in contrast to a record high of 64.2 percent in July ¶2008. Although prices continue to rise, the Government of Ethiopia (GoE) projects the rate of inflation to fall into single digits by June 2009. As inflation is falling, many Ethiopia-watchers expect Ethiopia's central bank to further devalue the Birr by about 15 percent in coming months. There is some hope that the Birr devaluation will boost exports, which have fallen well short of both targets and last year's performance during the past nine months. Finally, due to the drought-induced chronic shortage of power supply, the GoE required the two largest cement factories to halt production for at least two months and rolling blackouts have been extended to export factories, which are now forced to spend eight days per month without power. END SUMMARY. Decreasing Inflation Rates -------------- ¶2. (U) According to Ethiopia's Central Statistics Agency, annual headline inflation eased to 23.3 percent in April 2009 from a record high of 64.2 percent in July 2008. This decrease was mainly a result of price declines of imports such as fuel, fertilizer, and construction materials (particularly steel). Although food and cereals prices continue to increase, this increase is less than the corresponding period last year and the impacts of the largely-failed 2009 Belg season have not yet impacted market prices. As such, food and cereals inflation rates decreased to 25.4 and 40.0 percent in April 2009, respectively, down from record highs of 91.8 and 171.9 percent in July 2008. Food items account for over 57 percent of the weight in the consumer price index, indicating that inflation trends are closely tied to the seasonality of cereal production. ¶3. (SBU) The GoE and the local International Monetary Fund representative project inflation to be in the single digits by June. (Note: This target may be achieved, despite the continued increase in prices, as a result of the sharp spike in summer 2008 prices combined with the markedly lower world fuel prices this year. End Note.) The Ethiopian Development Research Institute (EDRI),a think tank of economic policy led by the Chief Economic Advisor to Prime Minister Meles Zenawi, projected headline inflation to be 3.8 percent in June and -3.0 percent in July 2009 in its confidential April inflation report. The GoE is currently pursuing a strategy to counter inflation and ease the balance of payments crisis. In October 2008, the GoE removed the fuel price subsidy and adjusted regulated domestic prices to the import parity. The GoE continues to import wheat for onward sale to the urban poor at subsidized prices, impose lending caps for commercial banks, and pursue an overall tight monetary and fiscal policy to avoid inflationary deficit financing. Broad money growth is estimated at 23 percent. Expected Birr Depreciation -------------- ¶4. (SBU) Aimed at easing the balance of payments and foreign exchange crises, Ethiopia's central bank (National Bank of Ethiopia) depreciated the Birr nearly 11 percent in the month of January 2009 to 11.02 Birr/USD. Since February, the GoE has depreciated the Birr another 20 cents. The Birr is now trading at 11.22 per USD, accounting for a 12.8 percent decrease in the past five months. In the parallel market, the Birr is exchanging at 13.5 per USD, a 20 percent spread from the official rate. The aforementioned EDRI report proposed an additional Birr depreciation of 10 to 15 percent and GoE sources informed EconOff that a 15 percent depreciation will be announced publicly in the next few months. Exports on the Decline -------------- ¶5. (SBU) Total exported goods have increased 20 percent per annum on ADDIS ABAB 00001276 002.2 OF 002 average in the past five years. This year, however, exports are not keeping pace with previous growth and are actually decreasing when comparing the first nine months of this fiscal year to last year. (Note: Ethiopia's fiscal year runs from July 8 through July 7 each year. End Note.) Although the GoE projected exports to total USD 2.5 billion in the 2008/09 fiscal year, only USD 1.0 billion has been recorded through the first nine months and coffee exports -- Ethiopia's major export earner -- are down 30% from last year. In the preceding fiscal year, total exports reached USD 1.5 billion, of which coffee constituted 35 percent. In the first nine months of the 2008/09 fiscal year, coffee exports only totaled USD 250.9 million, which is less than half of the total USD 525 million in coffee exports from the previous year. The GoE blamed coffee exporters for the decline in exports and as a result, revoked licenses of six major exporters and closed the warehouses of over eighty firms. The reduction of coffee exports appears to be tied to the decline in world prices as well as domestic problems associated with the new coffee marketing and control legislation and capacity constraints of the newly established Ethiopian Commodity Exchange (ECX) (reftel). Power Shortages Halt Factory Production -------------- ¶6. (U) Acute power shortages have prompted the Ethiopian Electric Power Corporation (EEPCo) to impose power interruptions across the country, where reportedly demand outpaces supply by 40 percent. The Ministry of Works and Urban Development announced that the GoE required state-owned Mugher Cement and the ruling party affiliated Mesebo Cement factories to halt production for two months due to their high electricity requirements during the chronic shortage of power supply. This decision was effective as of May 12 and applied only to the two dominant cement factories in the country, which account for over 90 percent of domestic production. The Ministry also revealed that close to 200,000 tons of cement (costing USD 44 million) will be imported to fill the supply crunch. ¶7. (U) Due to the GoE's focus on foreign currency-generating exports, it previously spared factories involved in export industries from power interruptions. These factories, however, no longer receive special treatment as of a May 11 GoE notification. Each factory now endures eight days per month without power according to a power-rationing schedule, just like all other electricity consumers. Comment -------------- ¶8. (SBU) The good news is that since inflation rates are falling, it should make it easier for the GoE to announce the much anticipated Birr depreciation -- which the GoE has delayed for fears that it would fuel already high inflation rates. Given the prevalence of the parallel market for foreign exchange, inflationary results of a currency devaluation should be tempered as a significant percentage of the local economy have been buying U.S. Dollars at 13.5 Birr/USD and passing on this cost to consumers. Ethiopia's banks have been fairly isolated from the global financial crisis, but declining exports and lower remittance flows are two key areas heavily affected by the global recession. In theory, a currency devaluation should allow Ethiopia to increase the volume of its exports, but the value of exported goods still remains in peril due to price destruction through various global markets. In addition to the negative effects of the global financial crisis on exports, Ethiopia's domestic production continues to be plagued by the extreme shortage of power due to lack of rains for hydropower and overall lack of power generating capacity. So extreme is the problem that the GoE decided to import cement to relieve demand in the short term despite the country's already precarious foreign exchange crisis. The GoE is normally solely focused on increasing exports to generate foreign exchange, so importing cement will only work against any increase in exports in the broader balance of payments. The construction of additional power plants is underway, but cannot come fast enough to fill demand. End Comment. YAMAMOTO