ETHIOPIA: INFORMATION REQUEST FOR G-20 MEETINGS

C O N F I D E N T I A L SECTION 01 OF 04 ADDIS ABABA 000557 SIPDIS STATE FOR EEB/OMA ALEX WITTINGTON TREASURY FOR IMB BILL MURDEN, WILBUR MONROE, AND MARY BEASLEY E.O. 12958: DECL: 03/04/2019 TAGS: ECON EFIN PGOV ET SUBJECT: ETHIOPIA: INFORMATION REQUEST FOR G-20 MEETINGS AND FINANCIAL CRISIS IMPACT REF: A. STATE 17502 ¶B. 2008 ADDIS 2569 ¶C. 2008 ADDIS 3422 ¶D. 2008 ADDIS 2800 ¶E. 2008 ADDIS 3467 ADDIS ABAB 00000557 001.2 OF 004 Classified By: Ambassador Donald Yamamoto. Reasons 1.4(b) and (d). -------------- Summary -------------- ¶1. (C) Per Ref A, the Government of Ethiopia (GoE) relishes its role as the chair of The New Partnership for Africa's Development (NEPAD) as the G-20 is set to convene March 14 to 15, 2009, and sees the position as a platform to help NEPAD revitalize its role in achieving policy autonomy for African nations. Additionally, the GoE is poised to use the G-20 summit as a venue to demand support for African nations that have been unwittingly affected by the global financial crisis. As the chair of NEPAD, the GoE hopes to outline some clear demands such as: 1) reforming international financial institutions, aid policy frameworks to better deal with the diversity of needs in Africa; and 2) insisting that no cuts be made to development assistance to Africa. The underlying theme behind the GoE,s forceful approach for the upcoming G-20 summit is to portray Africa, particularly least developed countries (LDCs),as victims of this financial crisis as a result of Western excesses. ¶2. (C) Although, Ethiopia sought the NEPAD Chair to attract international recognition for its democratic and economic leadership in contrast to growing international concern over its actions in these areas, the country,s economic profile continues to worsen rapidly and external aid remains a key facet of the GoE,s fiscal strategy. On the domestic front, Ethiopia will face twin challenges in its economy in the next several years. The first challenge will be diminished demand and lower world prices of key export goods as a result the global financial crisis. Secondly, the domestic economy may be further stifled by the GoE,s tightening embrace of statist policies which the GoE touts as being counteractive to the deleterious effects of the global financial crisis. The combination of declining exports and increased statist policies will likely result in a negative feedback loop, which could magnify the effects of the global financial crisis on Ethiopia,s burgeoning economy over a longer than expected period of time. END SUMMARY. -------------- -- GOE SEES NEPAD CHAIR AS POLITICAL BOOST AT G-20 -------------- -- ¶3. (SBU) The GoE is poised to take advantage of its role as NEPAD chair heading into the G-20 ministerial. The GoE views its leadership at NEPAD and the upcoming G-20 ministerial as a prestigious note and moreover as a chance to take the helm over African political affairs. The GoE sees the NEPAD role as an opportunity to give the West a "black eye" for many of the economic policies that the GoE believes led to Africa,s beleaguered state and ultimately its vulnerability to the global financial crisis. The onslaught of the global financial crisis has led many GoE officials to more openly vocalize their disdain for unfettered markets and the Western liberal economic principles. Not surprisingly, the GoE continues to praise China for its role in Ethiopian and African development. Prime Minister Meles Zenawi views the recent economic challenges that Ethiopia and many in the LDC group face as a result of the failure of the liberal economic policies and under-regulated financial system in the West. The GoE has suggested that the LDCs have been passive victims ADDIS ABAB 00000557 002.2 OF 004 in this latest financial crisis affecting capitals across the globe. Meles, latest comments to the African Union at the February 3, 2009, African Heads of State summit in Addis Ababa, focused on policy reformation within the international financial institutions and increased aid from donors as the short-term strategy for African nations to abate the effects of the global economic slow-down. The GoE sees an opportunity to help NEPAD and ultimately Africa take a seat at the table while aid and development policy is formulated in Washington and Europe. The Prime Minister's full comments may lend insight to the tone he takes in London and are available online at:www.africa-union.org/root/UA/Conferences/2 009/Jan/ Summit Jan 2009/doc/CONFERENCE/ASS PDT ETHIOPIA.DOC -------------- -- GOE CANNOT AFFORD A STIMULUS; AID IS THE ANSWER -------------- -- ¶4. (SBU) Following in line with Meles, goals during the upcoming G-20 Summit to push for improved resource flows from international financial institutions and sustained aid disbursement to Africa, to date, the GoE has not undertaken any stimulus measures in order to soften the impact of the global financial crisis on its domestic economy. The GoE,s ability to stimulate its domestic economy has been hampered by its severe balance of payment problems and the National Bank of Ethiopia,s (NBE) monetary tightening as a result of soaring inflation and an acute foreign exchange crisis (Ref B). Outside of the NBE,s proposed sale (albeit unsuccessful to date) of government bonds to the Diaspora in order to raise capital, the GoE has not been able to stimulate aggressively the domestic economy through quantitative easing (i.e. increasing the domestic money supply) and has relied solely on external support - particularly budget and balance of payments support from the World Bank (The Bank) and International Monetary Fund (IMF) -- to keep the economy from falling into an unstoppable downward spiral. ¶5. (SBU) Overall, the GoE,s approach to dealing with the economic slow-down and a real balance of payments crisis has been to request budgetary support from its multilateral and bilateral partners. In July 2008, the GoE requested direct budgetary support from the World Bank for its domestic fertilizer subsidization program (Ref C). In addition, in December of 2008, the GoE requested direct budget support from the IMF under its rapid-access component of the External Shock Facility (Ref D). The GoE sees aid as the answer to its fiscal problems and believes its hands are effectively tied in its ability to stimulate its domestic economy. Although the GoE plans to trim its deficit from 2.9 percent of GDP (USD 24 billion) in 2007/2008 (exclusive of state-owned enterprises, borrowing) to 1.5 percent in 2008/2009 (according to latest IMF analysis),the budget deficit could still balloon to north of 2.9 percent of GDP in FY 2008/2009 if global demand for Ethiopian exports continues to soften and remittances dip amid the global financial crisis. A bloated deficit would push the GoE further into the arms of donors in the West and East. -------------- FINANCIAL SECTOR REFORMS TAKE A BACKSEAT -------------- ¶6. (SBU) The GoE has viewed the global financial crisis and its crippling effects on many liberal and open economies around the world as a validation of its statist economic policies. GoE officials have regularly touted the "China" model as the benchmark for Ethiopia,s long-term economic direction. The current global financial crisis has clearly emboldened the GoE to become more entrenched in its state led ADDIS ABAB 00000557 003.2 OF 004 economic growth strategy and look to China for increased economic support. As recently as February 19, 2009, Trade Minister Girma Birru reaffirmed the GoE,s commitment to keep the country,s telecommunication and financial services sectors strictly under government control despite GoE efforts to accede to the World Trade Organization (WTO). Preceding Girma Birru,s comments, in statements to Parliament on October 16 and December 11, 2008, Prime Minister Meles boasted that the Ethiopian economy will be largely unaffected by the global financial crisis. Meles supported his notion of Ethiopia,s insulation to the crisis by touting the country,s closed banking and financial services sector -- with foreign financial services firms barred from entering the Ethiopian market and limited links to correspondent banking relationships existing (Ref E). -------------- REAL ECONOMY HAMPERED BY CRISIS -------------- ¶7. (SBU) Per Ref. E, Ethiopia,s real economy will be affected by the global financial crisis on several levels: 1) potential reduction in foreign transfers (roughly 40 percent of its budget) from international financial institutions, donors and Diaspora remittances; 2) the reduction in demand for Ethiopian exports, and subsequent reduction in government revenues -- although this may be countered by the devaluation of the Birr; and 3) decreased foreign direct investment (FDI) across the board. In the short-term, since Ethiopia is a major recipient of donors, development and humanitarian assistance, we do not expect to see an appreciable downturn in donor support from international financial institutions and donors. At the same time, we understand that the Bank will reduce Ethiopia,s IDA allocation in response to the passage of a restrictive civil society law. In January 2009, the IMF finalized a minimal USD 50 million "Exogenous Shocks Facility" for Ethiopia and the World Bank has engaged the GoE on accelerating assistance in response to the country's domestic macroeconomic crisis as well as the global crisis (Ref D). However, Diaspora remittances are likely to decline as the jobs picture for Ethiopians overseas becomes bleaker. Remittances normally account for USD 2 billion, or 10 percent of GDP. Anecdotal reports already indicate reduced remittance flows to families across Ethiopia and a recent GoE move to accept remittances from any source -- as opposed to only from correspondent banks abroad, as before -- suggests that these anecdotes are true. ¶8. (SBU) Ethiopia will not see the same over seven percent level of economic growth it has experienced in the last several years as its main export earners such as coffee and flowers continue to decline amid decreased demand due to the global financial crisis. According to local press accounts, income from the Ethiopian coffee exports have seen a close to 50 percent year-on-year decline since FY 2008 as world coffee prices and demand have dropped along with a drop in Ethiopia,s coffee production. In addition, press reports indicate that flower exports have only reached 60 percent of a targeted USD 298 million level over the last 18 months. Flower experts also say that the industry may also be hard pressed to meet USD 207 million target for FY 2009 due to softening global demand and price destruction at the Dutch auction market. On the FDI front, due to the loss of net wealth among potential investors around the globe, there will likely be a rise in the cancellation or delay of investments. FDI flows have already shown some troubling signs as the number of planned deals grows relative to actually implemented operational deals. Since 1993, the total stock of approved investment capital in Ethiopia reached USD 4.9 billion; however, only USD 158 million of that capital has been operational. ADDIS ABAB 00000557 004.2 OF 004 -------------- COMMENT -------------- ¶9. (C) The GoE,s statist rhetoric and its open criticism of developed countries, roles in exacerbating the impact of the global economic slow-down on LDCs suggest an inflammation in the dialogue between the GoE and the donor community. The upcoming G20 summit could be a launch pad for the GoE to reject wholesale Western liberal economic principles while remaining a nation mainly dependent on aid and foreign transfers. It is true that the GoE has embarked on an aggressive export led growth strategy in particular sectors over the last several years; however, there has been a real tightening of economic and political space during this same period. The overwhelming trend suggests that the recent ratcheting up of statist policies coupled with weakening global demand has begun to unravel the recent externally-driven economic gains in Ethiopia. More importantly, if aid is the answer to Ethiopia and Africa,s problems, as Meles Zenawi suggests, particularly during this period of global economic turmoil, then post will continue to push for greater explicit establishment of benchmarks for progress before endorsing additional aid disbursement to Ethiopia. Additionally, post will continue to suggest that Washington take a more serious look at implementing more sustainable development policies in Ethiopia in order to wean the country from its cycle of dependence on short-term aid. END COMMENT. YAMAMOTO