TREASURY FINDS AN ETHIOPIA MORE RELIANT ON AID THAN REFORM

UNCLAS SECTION 01 OF 03 ADDIS ABABA 000798

SIPDIS
SENSITIVE

DEPARTMENT FOR EEB/IFD/OMA - JWINKLER AND EEB/CBA - DWINSTEAD

DEPT OF TREASURY WASHDC FOR ANDY BAUKOL, DANIEL PETERS, REBECCA
KLEIN

E.O. 12958: N/A
TAGS: BEXP ECON EFIN ETRD EINV EAGR ET
SUBJECT: TREASURY FINDS AN ETHIOPIA MORE RELIANT ON AID THAN REFORM

REF: A) 2008 ADDIS ABABA 675
B) 2008 ADDIS ABABA 02569

ADDIS ABAB 00000798 001.2 OF 003


SENSITIVE BUT UNCLASSIFIED; BUSINESS PROPREITARY INFORMATION; NOT
FOR INTERNET DISTRIBUTION

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SUMMARY
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1. (SBU) In a March 12 visit to Ethiopia, Acting Assistant Secretary
of Treasury, Andy Baukol, found a Government of Ethiopia (GoE) that
has become more vocal about its need for sustained aid flows from
the West and more recalcitrant about implementing any reforms or
liberalization of key sectors such as banking and
telecommunications. Baukol noted that without reforms and
adjustment, Ethiopia was unlikely to resolve a balance of payments
crisis of its own making and could likely face a deeper and longer
recession than the broad global recession. GoE interlocutors
responded defensively by arguing that the World Bank (Bank) and
International Monetary Fund (IMF) do not know the right economic
policies and should just provide faster, unconditioned aid to
bolster Ethiopia's proven record of strong growth. Despite the
rhetoric, the GoE meetings made clear that the GoE has not developed
any sort of domestic plan or fiscal solution, besides reliance on
external aid, to offset the effects of the global financial crisis.
END SUMMARY.

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ECONOMIC SLUMP IS WEST'S FAULT SAYS GOE
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2. (SBU) In response to Baukol's inquiry into the effects of the
global crisis on the Ethiopian economy, Minister-ranked Chief
Economic Advisor to the Prime Minister Newaye Gebre-ab argued that
Ethiopia's closed banking system somewhat insulated the country from
the banking debacle around the world. Still, Newaye conceded that
Ethiopia has already started to feel the "second order" effects of
the global crisis, as heavy declines in coffee exports have been
registered. The Treasury officials emphasized reform, particularly
in banking and telecommunications, as a potential avenue for
Ethiopia to offset the impact of the global recession on its exposed
export sectors. Despite this advice, Newaye made clear that
Ethiopia was committed to maintaining its status quo economic
principles (particularly regarding the closed banking and
telecommunications sectors),largely discounting the reform message.
Newaye argued that the West's key role in precipitating the
economic turmoil would unfairly penalize Ethiopia and other African
countries that remain innocent bystanders in the current crisis, and
suggested, therefore, that the West has an obligation to provide
relief. Newaye explained that Africa would have to bear an
asymmetrical burden as "second order" effects of the crisis
eventually collapse trade in commodities and jeopardize aid to
Africa. Newaye lamented that Ethiopia and Africa's unfavorable
economic circumstances resulted from flawed Western economic
principles and excesses which ultimately led to the crisis.

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AID NOW, NOT LATER
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3. (SBU) Although Newaye blamed the West for Africa's current
economic problems, he remained fervently committed to Ethiopia's
position that aid should be sustained to Africa amid the economic
crisis. Aid is key over the short- and medium-term for Ethiopia to
emerge unscathed from the current global recession. He contended
that the money Ethiopia and Africa needed to survive the downturn
would be a trifle compared to the recent rounds of stimuli and
bailouts seen in the U.S. and Europe. He suggested that the
marginal returns that the many rounds of stimuli had provided in the
West would have generated significantly higher returns in Africa for
a fraction of the cost. Newaye openly asked the Treasury officials
what it would take for Ethiopia to achieve a minimum level of
support from the West to maintain aid and prop up trade. He
contended that the West needed to scale down its reform-oriented
rhetoric and, moreover, treat Ethiopia and Africa with a bit more
modesty and fairness during the crisis, particularly since they

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(Africans) are not to blame for the current crisis.

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ETHIOPIA'S PERFORMANCE ALONE WARRANTS AID
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4. (SBU) The overriding consensus from GoE interlocutors was that
Ethiopia's stellar economic performance over the last 15 years
warrants increased support through quickly-disbursed, unconditioned
aid. Newaye explicitly argued that the World Bank and IMF "do not
know what the right economic policies are." He explained that the
quick disbursement of aid would be the stimulus that would keep
Ethiopia's economy growing at the government professed levels of 11
percent during the global downturn. (Note: Although the GoE is
adamant in perpetuating the myth of sustained 11 percent annual
growth for the past five years, the assessments shared by us, the
IMF and World Bank internally, is that growth has been closer to
seven to eight percent. End Note.) Moreover, the Minister explained
that Ethiopia has come close to meeting many of its development
goals. He argued that this resulted from the GoE's strong economic
policies and that much of these gains would have been undermined if
Ethiopia had adopted policy recommendations from the Bank or IMF
earlier. In a separate meeting with the Treasury delegation, State
Minister for Finance Mekonnen Manyazewal also echoed Ethiopia's
previous stellar economic performance as a real benchmark for
progress and achievement of development goals.


5. (SBU) Minister Newaye said that "although the GoE remains
sensitive to the USG's comments and advice on reform, it requests
that the USG suspend judgment about Ethiopia's perceived policy or
economic shortfalls and focus merely on its real progress over the
long term." Newaye explained that the GoE is open to real policy
reforms in the future in order to stabilize and grow its economy.
The Minister did not elucidate the type or manner of reforms when
queried by the Treasury officials. However, he did say that any
reforms would need to follow a workable timeline and the government
would need enabling institutions in order to support policy shifts.
Interestingly, the Minister's main argument of increased aid,
without conditions, was buttressed by his claim that Ethiopia is
looking to limit its reliance on India and China for soft loans.
The Minister contended that the GoE would rather avail itself of the
IMF and World Bank facilities than rely solely on the Chinese and
Indians for external financing.

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PRIVATE SECTOR AND DONOR RESPONSE MIXED
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6. (SBU) Over lunch with private sector representatives,
participants argued that Ethiopia still remains attractive for
investment opportunities. However, the private sector has become
increasingly concerned about the acute foreign exchange crisis and
the perception of Washington's diminishing role and participation in
Ethiopia and Africa's economic development. One individual
referenced the recent announcement by China to establish a USD 5
billion sovereign fund for Africa's development. They asked why
Washington was not looking at establishing a program similar to the
Chinese fund. Although, the private sector officials at the lunch
recognized that the foreign currency crisis was choking the domestic
economy, some privately intimated that it was a good wakeup call for
the GoE.


7. (SBU) In contrast, Ambassadors from major donor nations painted a
picture of an Ethiopian economy in more dire straits. Pointing to
sustained negative real interest rates, the second-highest rate of
inflation in Africa, and foreign exchange reserves capable of
covering only four weeks of imports, the assembled diplomats
stressed the need for the GoE to release its tight control of the
economy. In particular, donor Ambassadors noted the need to create
a conducive environment for investment beyond Ethiopia's traditional
sectors and to liberalize the foreign exchange regime to avoid the
perpetuation of the current crisis. Participants showed consensus
in their views that the closed financial services and
telecommunications sectors detract particularly from Ethiopia's
ability to attract foreign investment and the dominance of state-
and party- owned enterprises in the economy further stymie the
development of a robust private sector.

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COMMENT
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8. (SBU) The GoE's resistance to medium or long-term economic
reforms or benchmarks in order to offset negative impacts of the
global financial crisis only makes worse an already dire economic
situation in Ethiopia as inflation remains significantly double
digit and the government reels from a severe balance of payments
crisis. Additionally, with the recent production halt of Coca Cola
in Ethiopia (Ref A) as a result of the country's forex crisis (Ref
B),it is not clear if the GoE understands the severity of the
global financial crisis' deleterious effects on foreign direct
investment and economic growth prospects in Ethiopia.


9. (SBU) Despite Ethiopia's clear challenges, the GoE is lauding the
recent pledges by the G-20 to increase the IMF's lending capacity
and flexible financing regime without conditions or requiring real
reforms as a victory. Public statements suggest that the GoE sees
the G-20's pledges as a validation of their previous economic
policies, where absolute performance, not long-term reform, reigns.
Some GoE officials believe that Ethiopia is poised to receive USD
400 million from the IMF and significantly increased assistance from
the Bank without adopting macroeconomic reforms. We know that
economic growth and performance figures have been grossly inflated
by the GoE, the country's macroeconomic imbalances are endogenous,
and the GoE does not have a clear strategy to correct them. As
such, although the IMF's increased lending capacity and flexible
financing programs will spur growth in the short-term in Ethiopia,
we believe that more, faster, and unconditioned aid to Ethiopia will
only serve as a band-aid, deferring the much needed macroeconomic
adjustments to another day. To advance the U.S. objective of
promoting sustainable economic prosperity, our bilateral assistance,
and our votes on assistance from multilateral sources, should
continue to be linked to, and contingent upon, economic policy
reforms and performance indicators. END COMMENT.

YAMAMOTO