Identifier
Created
Classification
Origin
09ADDISABABA1908
2009-08-06 10:19:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Addis Ababa
Cable title:  

SCENESETTER FOR STAFFDEL THOMAS VISIT TO ETHIOPIA

Tags:  OTRA ECON ETRD EAID PGOV ET 
pdf how-to read a cable
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UNCLAS SECTION 01 OF 03 ADDIS ABABA 001908 

SENSITIVE
SIPDIS

DEPT PASS TO SENATE FINANCE COMMITTEE FOR AMBER COTTLE AND
AYESHA KHANNA, ALSO USTR FOR LUIS JIMENEZ
NAIROBI PASS TO CHELSEA THOMAS

E.O. 12958: N/A
TAGS: OTRA ECON ETRD EAID PGOV ET
SUBJECT: SCENESETTER FOR STAFFDEL THOMAS VISIT TO ETHIOPIA

REF: STATE 78923

SUMMARY
-------

UNCLAS SECTION 01 OF 03 ADDIS ABABA 001908

SENSITIVE
SIPDIS

DEPT PASS TO SENATE FINANCE COMMITTEE FOR AMBER COTTLE AND
AYESHA KHANNA, ALSO USTR FOR LUIS JIMENEZ
NAIROBI PASS TO CHELSEA THOMAS

E.O. 12958: N/A
TAGS: OTRA ECON ETRD EAID PGOV ET
SUBJECT: SCENESETTER FOR STAFFDEL THOMAS VISIT TO ETHIOPIA

REF: STATE 78923

SUMMARY
--------------


1. (SBU) Your visit to Addis Ababa comes at a challenging
time for the Ethiopian economy. Average inflation stands at
36 percent -- the second highest in Africa, after Zimbabwe.
Despite two rounds of devaluation of the Birr by 10 percent
each this year, the real exchange rate remains overvalued.
Foreign exchange reserves stand at nearly two months of
import coverage -- a significant improvement from six months
ago -- that stems from an imposed stranglehold over lending
to the private sector. Real interest rates remain strongly
negative. Power-shedding due to inadequate electricity
generation capacity over the past three months has forced
manufacturing and a significant portion of business activity
to slow to a stutter. The global economic downturn has only
exacerbated the economy's own challenges. While AGOA exports
have more than doubled since last year, to $18 million, the
bulk of these are in the "leading sectors" which the
Ethiopian Government (GoE) has endorsed and liberalized.
Broader exports have stayed flat, despite projections of 25
percent growth. With exports of only $1.5 billion compared
to nearly $7 billion in imports, Ethiopia's trade imbalance
is dire and growing. End Summary.

GENERAL OVERVIEW OF THE ECONOMY
--------------


2. (SBU) Ethiopia remains one of the poorest countries in the
world. In 2008 its Gross Domestic Product (GDP) was
approximately USD 25.7 billion, with per capita GDP of USD

324. Chronic cycles of drought, high population growth,
state and ruling party dominance in numerous commercial
sectors, inefficient agricultural markets, and ever
increasing power outages all act to limit Ethiopia's economic
development. The agricultural sector comprises 45 percent of
GDP and employs 85 percent of Ethiopia's 79 million people.
Although Ethiopia's economy is relatively small, it is
growing at a fast pace. The GoE publicly touts that Ethiopia
has experienced double-digit real GDP growth of over 11
percent in recent years. The GoE predicts real GDP growth of

10 percent this year. Many institutions, including the World
Bank and IMF, dispute the GoE's growth statistics, stating
that Ethiopia's real GDP growth rate will most likely range
between six and seven percent this year.


3. (SBU) Total exports have increased over 20 percent per
annum on average in the past five years. Total exports this
year, remained flat over last year's level of $1.5 billion.
Coffee exports -- Ethiopia's major export earner -- are down
25% from last year. The GoE blames coffee exporters (who
were allegedly hoarding supply) for the decline in exports
and as a result, revoked licenses of six major exporters,
detained some company owners overnight, closed the warehouses
of over eighty firms, and confiscated their coffee stocks to
export directly from the GoE. Despite historical export
growth, the country suffers a severe trade deficit year after
year. Imports totaled USD 6.8 billion in 2008, creating a
trade imbalance of USD 5.3 billion. Ethiopia mainly imports
machinery, fuel, and consumer goods.

THE GOVERNMENT'S ROLE IN THE ECONOMY
--------------


4. (SBU) Since the early 1990's, Ethiopia has pursued a
development strategy based on a mixed economy of both state
and private enterprises. While the private sector role is
expanding, the state remains heavily involved in most
economic sectors and parastatal and ruling-party affiliated
companies continue to dominate trade and industry, hampering
full and free competition. All land in the country remains
state owned, although long-term leasing arrangements and
rural land registration for farmers have improved in recent
years. Foreign investment restrictions are widespread,
including key sectors such as banking, insurance, and
telecommunications. The state-owned Ethiopian

ADDIS ABAB 00001908 002 OF 003


Telecommunications Corporation (ETC) is the only service
provider in the sector, creating an environment of poor
telecom service and access. In a country of nearly 80
million people, there are only 920,000 fixed phone lines, 1.8
million cell phones, and 29,000 internet connections. The
GoE maintains a hard line stance on these key sectors, but
some eventual liberalization may take place as part of the
ongoing World Trade Organization (WTO) accession negotiation.


5. (SBU) The GoE alone has selected the "leading sectors" in
the economy. These are: 1) hides, skins, and leather; 2)
pulses and oilseeds; 3) floriculture and horticulture; 4)
textiles; and 5) coffee. In these sectors, the GoE has
liberalized significantly: inviting foreign investment;
offering attractive investment incentives; and generously
allocating land, credit, and support. As a result of opening
up such sectors -- which are geared toward increasing exports
and foreign exchange -- these sectors generally have
flourished. Whereas each new investor in these sectors
continues to enjoy robust incentives and support, investors
interested in doing business in other sectors, businesses
focused on domestic demand, or even entrepreneurial investors
in new sectors continue to be impeded by near-constant
bureaucratic obstacles to doing business in Ethiopia. In
many cases, sectors are further restricted to Ethiopian
investors, and in some, to the GoE only. As a recent sign of
potential diversification from the leading export sectors,
GoE officials have begun to mention applying import
substitution theory as an alternative means to reduce the
trade deficit and increase foreign exchange reserves.

A FUNDAMENTAL MACROECONOMIC IMBALANCE
--------------


6. (SBU) Against this ideological foundation, state control,
and skewed incentives, it is no surprise that the Ethiopian
economy faces a fundamental macroeconomic imbalance. By
mandating low interest rates, and representing the dominant
borrowing force in the country, for years the GoE has ensured
cheap credit for itself through highly-negative real interest
rates. By so enabling excess demand and accommodating it
with excess liquidity, Ethiopia has seen a spike in inflation
for the past three years. Year-on-year inflation peaked in
August 2008 at 64 percent. While last year's high prices
have limited year-on-year inflation now to single digits, the
12-month average inflation rate remains at 36 percent. The
reluctance of the GoE to adjust its fixed peg exchange rate
to accommodate this inflation has resulted in a real exchange
rate that was as much as 40 percent overvalued in late-2008.
The external imbalance which this induced brought foreign
exchange reserves to a perilously low level of two weeks of
import coverage. The resulting crisis forced the GoE to seek
IMF assistance and advice. Two rounds each of 10 percent
devaluation of the Birr (against its U.S. dollar peg) have
helped re-build reserves, but have come only on the eve of
IMF Board votes on assistance to Ethiopia.


7. (SBU) The exogenous global commodities price shock of 2008
exacerbated Ethiopia's endogenous economic crisis. While the
GoE has become more forthcoming with IMF and World Bank
officials in opening its books, it is clear that the GoE is
more willing to meet nominal macroeconomic targets through
false growth figures and further strangling the private
sector than in fundamentally addressing the
ideologically-driven policies that have caused the
fundamental imbalance. To suppress inflation and re-build
foreign exchange reserves, the GoE imposed a credit cap on
all banks in May, limiting lent-out capital to levels
prevailing on the day of the directive. Despite promises to
permit the repatriation of profits, the central bank does not
allocate adequate foreign exchange to commercial banks to
effect such hard currency payments. To stand by its pledge
of keeping deficit spending at zero, the GoE initiated a
fierce crack-down on the private sector to expand state
revenues. National and foreign enterprises alike have been
given previous-year tax bills of up to tens of millions of
dollars after secret "desk audits." Some of these come after
firms had already been audited for the tax year. Finally,

ADDIS ABAB 00001908 003 OF 003


with the growing international scrutiny over the government's
books, the GoE and SOEs are increasingly turning to China for
soft loans and awarding Chinese firms with lucrative
contracts -- including many which are sole-sourced,
non-competed contracts for major infrastructure projects.
American firms routinely complain that Ethiopia's government
monopoly telecommunications system is inconsistent and
inadequate and the absence of international banks only
exacerbate the disincentives to invest posed by bureaucratic
and state-imposed impediments.

THE DOMESTIC POLITICAL ENVIRONMENT
--------------


8. (SBU) The May 2005 elections and their aftermath continue
to weigh heavily on Ethiopia's domestic political scene. The
U.S. Embassy has strongly advocated for transparent and open
national elections in 2010, the next major milestone in
Ethiopia's democratization process. 2005 saw the opposition
take 170 seats in the 547 seat national parliament, a
dramatic increase over the 15 seats they held for the
previous decade. While the run-up to these elections was the
most free and fair in Ethiopia's history, electoral
irregularities prompted the opposition to launch an organized
civil disobedience campaign that turned violent when
confronted by security forces. These security forces killed
nearly 200 protesters, detained more than 30,000 suspected
demonstrators, and arrested most of the opposition
leadership, charging them with capital crimes ranging from
treason and genocide to "outrages against the constitution."
The leaders were tried and found guilty, but pardoned in

2007. Some of the leaders stayed in Ethiopia, but others
left and are now advocating for a change of government "by
any means necessary." Since 2005, the government has enacted
laws which limit and restrict party politics, the media, and
civil society, including a law limiting the ability of civil
society organizations (NGOs) to receive funding from foreign
sources and participate in the political process. The April
2008 local elections saw the ruling party take over all but
three of over three million seats. The next national
elections are scheduled for May 2010.

U.S. ASSISTANCE TO ETHIOPIA
--------------


9. (SBU) Ethiopia is now the second largest recipient of U.S.
foreign assistance in sub-Saharan Africa. The preponderance
of this assistance is humanitarian, including food aid, the
President's Emergency Plan for AIDS Relief (PEPFAR),the
Child Survival and Health Program Funds (CSH),of which a
significant share supplements the Government of Ethiopia
budget. Relatively little assistance, about five percent of
the total, directly contributes to Ethiopia's internal
economic stability and sustainable growth. Assistance
designed to promote economic stability concentrates on
agricultural development -- particularly in vulnerable,
conflict-prone areas, in order to achieve food security --
and on healthcare services. Notably, the operating
environment and transaction costs for non-budgetary foreign
aid are increasing, as a result of new GoE restrictions on
non-governmental organization (NGO) implementing partners.
GONZALES