ETHIOPIA: IMF DETAILS ECONOMIC PROGRESS AND CONCERNS

UNCLAS ADDIS ABABA 001473 SIPDIS SENSITIVE STATE DEPARTMENT AF/E, AF/PDPA, OES, AND PRM/AFR USAID for AFR EGAST, CTHOMPSON LONDON, PARIS, ROME FOR AFRICA WATCHERS USMISSION UN ROME FOR RNEWBERG NEW YORK FOR DMERCADO USEU FOR PBROWN GENEVA FOR NKYLOH, RMA DEPT OF TREASURY FOR REBECCA KLEIN DEPT OF COMMERCE FOR MARIA RIVERO E.O. 12958: N/A TAGS: EAID ECON EAGR PREL PGOV ET SUBJECT: ETHIOPIA: IMF DETAILS ECONOMIC PROGRESS AND CONCERNS -------------- Summary -------------- ¶1. (SBU) On Saturday June 20, 2009, representatives of the donor community were invited to a briefing by the head of the IMF review delegation which had been consulting with the Ethiopian government over the previous week. The IMF team was both reviewing progress on the agreed macro-economic actions by the government from December, as well as planning for the financial support package related to the global financial crisis. The IMF expressed overall satisfaction with the performance of the Ethiopian government since December, noting that oil products were no longer subsidized due to the decline in world prices, that the government had ceased domestic borrowing and initiated more control over public enterprise borrowing, and that these factors had brought inflation down to under 10% from a peak of over 60% in 2008. However, they expressed concern about monetary growth, poor tax performance and declines in the real rates of economic growth (as opposed to the official rates). The total package of support from the IMF has yet to be finalized, but initial support from the Economic Stabilization Fund (ESF) is expected to be in the $250 million range (not including the new, non-conditional access of Ethiopia to Special Drawing Rights of about $480 million). This takes place against a background of the Ethiopian PM pressing for less conditionality for donor support, while resisting structural changes to address underlying economic problems. -------------- Background -------------- ¶2. (U)There has been a high level of concern about Ethiopia's macro-economic conditions for the last two years, as inflation escalated (mainly due to domestic issues such as rise in grain prices and high government borrowing and expenditure),the balance of payments grew worse, and foreign currency reserves dropped to less than six weeks of imports. Agreements were reached with the government after an IMF mission in December 2008 which included a number of stabilization initiatives to reduce inflation and increase the foreign currency reserves. Although the IMF recognized that these issues were driven by structural problems, they argued that their mandate focused them exclusively on stabilization issues. It would be the responsibility of the World Bank and other donors to tackle structural issues such as the balance of payments problem. -------------- IMF Briefing -------------- ¶3. (U) Sean Nolan, the head of the IMF delegation, along with IMF Country Director Sukhwinder Singh, briefed a group of about twenty donors, including Ambassador Donald Yamamoto and Acting Mission Director for USAID Nancy Estes. ¶4. (U) He opened with a briefing on the global financial crisis response, which provided an extra credit line from the Special Drawing Rights (SDR's) for member countries of IMF (which amounts to $480 million for Ethiopia) and a planned trebling of loans to developing countries. While much of the attention for the response was focused on Eastern European countries, there was a conscious effort to ensure African countries were not left out. ¶5. (U) The macro-economic situation in Ethiopia has improved in his opinion, with a marked decrease in inflation to 4-5% in June from over 12% in the month of June alone last year. Official annual growth is forecast at 10% for 2009-10, but the IMF has a more conservative estimate of 7%. Exports are expected to be flat while imports will grow, remittances are stagnating rather than decreasing. The Government of Ethiopia (GOE) has met most of the requirements under the agreement on stabilization such as market level prices for oil and no domestic government borrowing, but the degree to which borrowing by public enterprises and monetary growth are really under control is still questionable. The GOE strongly accepts the need to keep inflation down, but is reluctant to reduce spending, especially on the large poverty reduction budget. ¶6. (U) Sean Nolan was reluctant to spell out the degree of support that the IMF would be negotiating with the GOE. The Economic Stabilization Fund (ESF) support was determined largely by the degree of economic shock each country went through, and the official figures are not that bad in Ethiopia. Ethiopia is eligible for at least $250 million under the IMF formula, and further amounts were also probable (in tranches linked to stabilization indicators). ¶7. (U) He finished the briefing with an appeal to donors to support work on three issues: 1) Tight control over borrowing by public enterprises. Oversight is needed on borrowing by the State Oil Company, Electric Company, Telecommunications Corporation especially, all of which have borrowed heavily in the past. 2) Central Bank control over the currency - especially using better treasury borrowing mechanisms such as bonds. 3) Improved tax collection. There was very poor performance of taxation against GDP. Taxes were generally high, but there were many exemptions. Petroleum tax is very low, but could be a cash cow for the GOE. -------------- Discussion -------------- ¶8. (U) Considerable skepticism was voiced on the projected economic growth rate given the problems with all of the 'drivers of growth'. With reduced demand and prices for exports such as coffee and flowers, stagnating or declining remittances and foreign investment, and restricted increases in government expenditures, where is the growth going to be fuelled from, even at the reduced 7% level? ¶9. (U) Questions were also raised about the currency exchange rate, with devaluation also part of the December agreement between the IMF and GOE. While there has been a devaluation of 10% early in 2009, and gradual devaluation since, the real exchange rate for the Ethiopian birr has still been rising and black market rates increasing rapidly. Sean Nolan declined to talk about his discussions on currency exchange with the government, but hinted there was no major pressure for devaluation. ¶10. (U) Donors were very curious about the size, timing, and conditionality of upcoming IMF support, but there was no further information provided. ¶11. (U) The continued decline in inflation predicted by the government and supported by the IMF was also questioned. Official grain production in Ethiopia had increased by 8%, which strained credibility in a poor rainfall year (general sense that there was no or very little increase in food production in 2008). While the government had taken measures to stem food inflation, such as stockpiling and elimination of credit purchasing by private grain traders, the rise in demand against stagnant supply could overwhelm these measures and cause higher food inflation. -------------- Comment -------------- ¶12. (SBU) The IMF generally painted a good news picture of Ethiopia, but there were underlying concerns which the IMF did not address. While the government has acted positively on issues related to the immediate stabilization, such as reducing inflationary pressure from money supply and government expenditures, they were resisting tackling structural issues. Most of the most critical issues - exchange rate, banking, stock exchange, extra budgetary borrowing and land policy - are being resisted. A good donor dialogue is needed on these issues, which must be inclusive of USG and not just left to the World Bank and IMF. End Comment. YAMAMOTO