ETHIOPIA: ECONOMIC HIGHLIGHTS NOVEMBER 2009

UNCLAS SECTION 01 OF 03 ADDIS ABABA 002763

SIPDIS
SENSITIVE

DEPARTMENT FOR EEB/IFD/OMA - JWINKLER AND EEB/CBA - DWINSTEAD
DEPT PASS TO U.S. PATENT AND TRADEMARK OFFICE - AMY COTTON
DEPT PASS TO USTR FOR PATRICK COLEMAN, CECILIA KLEIN, AND BARBARA
GRYNIEWWICZ
DEPT OF COMMERCE WASHDC FOR ITA MARIA RIVERO
DEPT OF TREASURY WASHDC FOR REBECCA KLEIN
USAID FOR AFR/EA - HELLYER, DALTON, AFR/SD - CURTIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV ET
SUBJECT: ETHIOPIA: ECONOMIC HIGHLIGHTS NOVEMBER 2009

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SENSITIVE BUT UNCLASSIFIED; NOT FOR INTERNET DISTRIBUTION


1. (SBU) SUMMARY: Recent economic highlights in Ethiopia include:
1) Government of Ethiopia (GoE) claims 10 percent Gross Domestic
Product (GDP) growth for fiscal year 2008/09; 2) Falling inflation
rates; 3) Birr still overvalued at 12.59 per USD alongside
continuing foreign exchange crunch; 4) Widening trade deficit; and
5) Electricity supply boosted by three new plants. President Girma
Woldegiorgis announced Ethiopia's 10 percent GDP growth to
Parliament amid doubts expressed by international economists as well
as opposition party members about how Ethiopia could have attained
such high growth given tough economic times locally and abroad.
Annual year-on-year inflation rates have tumbled into the negative
percentages--negative 3.7 percent in October 2009--in comparison to
the exorbitant rates of 2008 (64 percent in July 2008). Annual
average inflation is 14 percent as of October 2009. The Ethiopian
Birr is trading at 12.59 per USD, but is still overvalued according
to the International Monetary Fund (IMF). The foreign exchange
crisis continues to plague the country as the trade deficit
continues to widen and Ethiopia continues to fall short of its own
export targets. Export growth was flat in 2008/09 compared to
2007/08, but imports continued to rise. Total exports were USD 1.4
billion in 2008/09 and total imports were USD 7.7 billion, creating
a trade deficit of USD 6.3 billion. Finally, the power supply
crisis has abated somewhat as the rainy season has ended (filling
the dams). The Tekeze Hydro Electric dam officially came online in
mid-November and two new hydro power plants will be online by March

2010. END SUMMARY.

10 Percent GDP Growth?
--------------


2. (U) On October 5, President Girma Woldegiorgis reported to
Parliament that Ethiopia's economy grew at 10.1 percent during the
2008/09 fiscal year (ending July 7, 2009). He suggested, but
stopped short of predicting, government policies would succeed in
achieving the same economic feat in the upcoming year as well.
Woldegiorgis stated two main GoE objectives for the 2009/10 fiscal
year: 1) achieving 10 percent GDP growth rate for the seventh
consecutive year; and 2) maintaining inflation rates less than 10
percent. According to the GoE, Ethiopia's average real GDP growth
was 11.5 percent during the past six years.


3. (U) International economists and Ethiopia's political opposition
have cast doubt on the high GDP growth figures for this past fiscal
year. The IMF stated publicly it believes GDP growth was
approximately 7 to 8 percent in fiscal year 2008/09 and will likely
be around 7 percent in 2009/10. Ken Ohashi, World Bank Country
Director for Ethiopia and Sudan, argued in a locally published
article Ethiopia's growth "miracle" has run into difficulties since
2008 due to high inflation and an acute shortage of foreign
exchange. He noted that while inflation, which peaked at 64 percent
in July 2008, has moderated, there are few signs that the shortage
of foreign exchange is abating. Opposition party members also
rejected President Girma's stated figures. Prominent opposition
leader Merera Gudina accused the GoE of "cooking" the data. He said
average Ethiopians would know the figures were false because their
standard of living has failed to improve.


4. (SBU) Comment: GDP growth of 10 percent seems unlikely given the
economic hardships Ethiopia endured this past year. On top of the
global financial crisis and the decline in key exports such as
coffee, poor rains crippled the dominant agriculture sector, lack of
power generation forced partial shutdown of factories, and the acute
shortage of foreign exchange persisted with no end in sight. End
Comment.

Tumbling Inflation Rates
--------------


5. (U) According to Ethiopia's Central Statistics Agency, annual
year-on-year inflation sharply declined to -3.7 percent in October
2009 down from a record high of 64.2 percent in July 2008.
Similarly, annual average inflation tumbled to 14.1 percent in
October from a record high of 46.2 percent in February 2009. Annual

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food and cereals inflation rates fell to -12.8 and -27.4 percent in
October 2009, respectively, down from record highs of 91.8 and 171.9
percent in July 2008. Food items account for over half of the
weight in the consumer price index, so overall inflation trends are
closely tied to the seasonality of cereal production. Factors that
contributed to the decline in inflation include the GoE's tightening
of fiscal and monetary policy in late 2008, the importation of
wheat, and a properous cereals harvest during November and December

2008. A recent IMF report stated that although high food price
volatility and stubborn non-food price inflation are significant
risks in Ethiopia, single digit inflation looks to be achievable in
the current fiscal year.


6. (SBU) Comment: Although annual inflation rates have sharply
declined in the past few months, prices are still significantly
higher compared to two years ago and food prices are expected to
rise again in early 2010 due to forecasted food shortages. Overall,
food, and cereals inflation rates, respectively, were 55.3 percent,
61.4 percent and 103.9 percent higher when compared to two years
ago. In addition, Ethiopians are increasingly feeling the pinch of
rising fuel prices ever since the GoE lifted its fuel subsidy in
October 2008. Gas prices hit 12.39 Birr per liter (USD 3.72 per
gallon) in October 2009, up over 65 percent (in Birr terms) from
just six months ago. Gas prices were 7.47 Birr per liter (USD 2.53
per gallon) in April 2009. End Comment.

Birr Still Overvalued; Forex Crunch Continues
--------------


7. (SBU) The Ethiopian Birr is now trading at 12.59 per USD,
demonstrating a 26 percent depreciation in the past nine months.
The spread between the official and parallel market rate has
narrowed to 5 percent in contrast to 20 percent in 2008. The IMF
believes the Birr is still overvalued and that Ethiopia faces a
difficult external environment in 2009/10. The IMF's estimate on
the level of Ethiopia's foreign currency (forex) reserves suggest a
troubling outlook for the country's balance of payments as the
global recession continues to take a toll on remittances, exports,
foreign direct investment, oil prices, and official development
assistance. The current level of forex reserves stands at USD 1.8
billion, up from a record low of about USD 700 million at the end of

2008. The IMF estimates forex reserves will shrink by USD 250
million in the coming months which will reverse one-half of the
reserve rebuilding achieved in fiscal year 2008/09.


8. (SBU) Comment: Further depreciation of the Birr in the current
fiscal year is expected, but the Birr should not devalue much beyond
14-15 Birr/USD. The narrowing spread between the official and
parallel exchange rates is explained by the fact that the Birr is
getting closer to a market-balanced exchange rate and the GoE's
crackdown on black market traders. The lack of forex continues to
constrain private sector development and the GoE's ability to handle
adverse shocks to the economy. The recently approved USD 241
million Exogenous Shocks Facility (ESF) IMF loan will boost forex
inflows and help reserves recover in the short term; however, the
GoE needs a long-term strategy to address this critical problem.
End Comment.

Widening Trade Deficit
--------------


9. (SBU) Ethiopia's exports totaled only 1.4 billion in fiscal year
2008/09, missing the USD 2.5 billion target by over 40 percent.
Exports actually decreased slightly from the 2007/08 year of 1.5
billion. Coffee exports--Ethiopia's major export earner--were down
28 percent from last year in terms of value and coffee's share of
total exports shrunk from 35 to 26 percent. The GoE blames domestic
marketing problems and the decline in world commodity prices as
causes for the slash in coffee export earnings. On the other hand,
total imports were valued at USD 7.7 billion during 2008/09, an
annual increase of 14 percent. Capital goods imported accounted for
USD 2.5 billion or 32 percent of the total, followed by consumer
goods of USD 2.3 billion, and fuel of USD 1.3 billion. Therefore,
the trade deficit widened to USD 6.3 billion in 2008/09, in contrast
to USD 5.3 billion in the preceding year. The IMF attributed the

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ballooning trade and balance of payments deficits primarily to an
increase in public sector spending. Despite the poor export
performance in 2008/09, the GoE set an ambitious export goal of USD
2.9 billion for fiscal year 2009/10. Ethiopia has already missed
the first quarter mark by 31 percent, earning only USD 343 million
compared to the USD 496 million projection.


10. (SBU) Comment: The newly-established Ethiopia Commodity
Exchange (ECX) created a variety of logistical problems for both
buyers and sellers in the industry during the past year. ECX has
worked hard to resolve these issues and a bumper coffee harvest is
expected this year. Coffee as well as other exports, however, still
faces serious risks from any global economic downturn and the threat
of drought. The GoE is not only working to boost exports from a
variety of sectors, but it is finally beginning to entertain
discussions of import substitution as a means to reduce the trade
deficit. It is not clear at this time which, if any, priority
sectors for import substitution the GoE will identify. End
Comment.

Power Supply Boosted By Three New Plants
--------------


11. (U) Three new hydroelectric power plants are set to generate
over 1000 megawatts (MW) of electricity to address the chronic power
shortages across Ethiopia. Tekeze Hydro Electric power plant held
its inaugural ceremony on November 14 and it has a 300 MW capacity.
Two other plants, Tana Beles and Gilgel Gibe II, are nearly complete
and will begin generating power by March 2010.


12. (SBU) The chronic power outages of early 2009 abated somewhat
towards the end of the rainy season in September/October, as many
hydro power dams filled with water. Periodic power outages do
continue though, as demand continues to outpace supply. CDA Meece
and post's Regional Environmental Officer attended the November 14
onsite ceremony at Tekeze Dam in remote northern Ethiopia to
highlight U.S. Company MWH's involvement in the design of the dam.
CDA Meece's speech received positive press coverage highlighting
U.S. involvement alongside Chinese company involvement in the
construction. The Tekeze dam is currently generating only 75 MW of
its 300 MW capacity. GoE officials claim water levels are
sufficient to operate the plant at full capacity, however, at full
capacity the dam would run out of water before the next rainy
season. GoE officials report that after the 2010 rainy season, the
dam's reservoir should have sufficient levels to run at full
capacity. End Comment.
MEECE