VZCZCXRO3005
PP RUEHROV
DE RUEHDS #1970/01 2000826
ZNR UUUUU ZZH
P 190826Z JUL 06
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC PRIORITY 1631
INFO RUCNIAD/IGAD COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 03 ADDIS ABABA 001970 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR AF/E AND EB/FID 
DEPARTMENT PASS TO TREASURY 
DEPARTMENT PASS TO USAID 
 
E.O. 12958: N/A 
TAGS: ECON EAID EFIN KHUM PGOV ET
SUBJECT: WORLD BANK PRESIDENT'S VISIT HIGHLIGHTS POSITIVE 
DEVELOPMENTS, NEED FOR POLITICAL HARMONY 
 
 
SENSITIVE BUT UNCLASSIFIED-- PROTECT ACCORDINGLY 
 
1.(SBU) SUMMARY:  World Bank Country Director for Ethiopia 
reported to the Ambassadors Donors Group (ADG) that World 
Bank President Paul Wolfowitz's July 11-12 visit to Ethiopia 
had resulted in Wolfowitz's full support for the new 
Protection of Basic Services (PBS) program and a positive, 
though cautious, view of recent economic and political 
developments.  The visit included stops in both Addis Ababa 
and the Amhara Region, where he met with representatives from 
government, the donor community, the private sector, and 
civil society.  Annual World Bank support for Ethiopia now 
totals $500 million, with the potential for significant 
scaling-up if the Government of Ethiopia (GOE) fulfills its 
commitments on increased transparency, accountability, and 
good governance.  Key to these commitments is what Wolfowitz 
described as the need for "political harmony."  In briefings 
with the press, Wolfowitz was generally positive about 
prospects for Ethiopia's development, emphasizing the need 
for sustained growth and political harmony to truly transform 
Ethiopia.  Wolfowitz's meeting with Prime Minister Meles was 
described as "comforting," with the Prime Minister supportive 
of the PBS program and committed to political reconciliation. 
 Recent positive developments, both economic and political, 
are seen by the World Bank as creating a number of openings 
in key areas such as infrastructure development and the 
strengthening of basic services.  World Bank and GOE 
relations according to Wolfowitz are "normalized on a new 
basis." END SUMMARY. 
 
WOLFOWITZ VISIT "A-CLASS" 
------------------------- 
 
¶2. (SBU) During a briefing to the Ambassadors Donors Group on 
July 13, World Bank Country Director for Ethiopia and Sudan 
Ishac Diwan, described Wolfowitz's recent July 11-12 trip to 
Ethiopia as an important visit that resulted in a more 
complete understanding, buy-in, and ownership by Wolfowitz of 
the new Protection of Basic Services (PBS) program. During 
the two day-visit, Wolfowitz met in Addis Ababa with Prime 
Minister Meles and key members of the cabinet, members of 
parliament, donors, civil society, and the private sector. 
Wolfowitz also traveled to the Amhara Region, where he was 
able to talk first-hand with members of civil society and 
review basic services, such as education.  Diwan stated that 
the trip also provided an opportunity for Wolfowitz to gain a 
better understanding of the role of the Diaspora, including 
how to manage the Diaspora in the United States.  The 
attitude of the private sector was described as radically 
improved over just two years ago: today they are more 
positive, citing improved dialogue with the government.  What 
remains needed for business development, however, is to 
create a culture of innovation and competition.  For donors, 
the PBS concept has now been internalized, Diwan said. 
 
¶3. (SBU) During a 90-minute meeting with Wolfowitz, Prime 
Minister Meles outlined his vision for the country: private 
sector development based on small and medium-sized business 
(SMEs) and the export sector, and greater transparency and 
space for civil society at the local level.  According to 
Diwan, Meles also acknowledged a change of heart about the 
private sector, whereby he now understood that profits should 
be considered a positive result of business.  Though Meles 
and Wolfowitz did not directly discuss the Eritrean-Ethiopian 
border, Meles reiterated his oft-used phrase that poverty, 
not war, was Ethiopia's real enemy.  Wolfowitz was described 
as being "comforted" by Meles' presentation on the country's 
direction, as well as Meles' shared commitment to political 
harmony and support for the PBS program.  Wolfowitz 
acknowledged that now is an opportune time to consolidate 
programs, and keep a focus on governance and transparency. 
 
BASIC SERVICES THE FOUNDATION, POLITICAL HARMONY THE KEY 
--------------------------------------------- ----------- 
 
¶4. (SBU) Wolfowitz's vision for transforming Ethiopia was 
described as ten years of growth and stability.  For 
Wolfowitz, basic services are the foundation of the pyramid 
and therefore must be preserved.  World Bank-GOE relations 
were described as "normalized on a new basis."  Key to 
continued World Bank support will be GOE action on various 
commitments in the areas of political harmony, governance, 
accountability, and transparency.  While the World Bank has 
committed to providing $500 million over the next year, 
including $215 for PBS, progress in key areas such as 
political reconciliation, transparency, and accountability 
 
ADDIS ABAB 00001970  002 OF 003 
 
 
could result in significantly scaled-up funding.  The trial 
of detained CUD leaders and members of civil society is 
another area that the World Bank will be watching in terms of 
future assistance levels.  Diwan reported that the Prime 
Minister had told Wolfowitz that progress on the political 
process could lead to greater leniency for the detainees. 
 
BUILDING ON THE MOMENTUM 
------------------------ 
 
¶5. (SBU) Diwan described a number of areas where donor 
assistance could build on recent political and economic 
momentum and openings.  These include: enhancing basic 
services, strengthening the GOE's Productive Safety-Net 
Program (PSNP), creating a culture of innovation and 
competition within the private sector, consolidating the Nile 
Basin Initiative, strengthening regional governments, and 
building key infrastructure such as secondary roads and dams. 
 On basic services, Diwan said it will be key for the GOE to 
deliver on its promise of increased transparency and 
accountability, and, particularly, allow an increased role 
for civil society.  Donors present at the briefing stressed 
that there needed to be a broad definition of civil society 
that included local civil society organizations (CSOs), 
non-governmental organizations (NGOs), and rural 
associations, as well as improved dialogue between the GOE 
and CSOs. There currently is some confusion among donors 
about a GOE proposal that seemed to place greater emphasis on 
rural associations, which are often party-affliated, and only 
later engage CSOs and NGOs.  For the PSNP, the focus will be 
on strengthening the program so that beneficiaries eventually 
"graduate," as well as ensuring that the program will not be 
used as a political tool. (COMMENT.  Following the May 2005 
elections, there was evidence that some beneficiaries had 
been removed from the program for political reasons.  END 
COMMENT.)  To support greater transparency in the PSNP, for 
example, there will be the introduction of public 
dissemination of the names of beneficiaries, with a 
particular emphasis on ensuring disclosure to civil society 
and parliamentary members. 
 
¶6. (SBU) Even larger openings are seen by the World Bank in 
building key infrastructure, including secondary roads to 
develop market linkages for rural populations, and developing 
hydro-electric potential, increased irrigation, and private 
sector development.  Diwan noted that there had been process 
on information technology (IT) policy reform, though at a 
slower pace than donors would like.  He also noted that 
Minister of Trade and Industry Girma Birru had expressed 
support for the creation of an equity market, though not in 
the banking sector. 
 
MACROECONOMIC STABILITY, ECONOMIC REFORM, 
AND IMF ENGAGEMENT 
------------------------------------------ 
 
¶7. (SBU) While the objective of Wolfowitz's visit was not 
focused on recent economic developments or reforms, these 
issues were discussed with both the government and private 
sector.  On telecommunications, a sector where donors have 
pushed for greater liberalization, Meles acknowledged that 
the GOE and donors do not agree on how best to develop the 
sector, but that it was acceptable to agree to disagree. 
Ethiopia's banking sector was described by the World Bank as 
moving in the right direction, with the GOE's strategy of 
gradual liberalization (as opposed to, for example, opening 
the sector to full foreign investment) as an appropriate 
approach.  There also appeared to be an opening for 
International Finance Corporation (IFC) engagement, for 
example, with IFC potentially providing partial guarantees to 
local banks. Ethiopia's macroeconomic fragility was 
acknowledged, noting that there were certain red-lines that 
should not be crossed.  (COMMENT: One such red-line, relating 
to levels of foreign reserves, may have already been crossed 
with reserves dipping below 3 months export coverage. END 
COMMENT.)  Another concern on the macroeconomic side is 
rising inflation, which hit 5 per cent for June.  Though 
analytical reports tend to be contradictory, there is concern 
about rising petty corruption.  The IMF Resident 
Representative told the ADG that the IMF is trying to engage 
the GOE outside of a formal program.  Specifically, it 
appears that the GOE may be open to the IMF conducting 
macroeconomic assessments, although formal GOE agreement for 
such work would still be needed.  It was noted that Wolfowitz 
will be speaking with the IMF Managing Director about a 
Preparation Strategy Report (PSR). 
 
ADDIS ABAB 00001970  003 OF 003 
 
 
 
¶8. (SBU) COMMENT. The World Bank Country Director made clear 
that Wolfowitz's positive views and public comments did not 
imply that challenges, both economic and political, do not 
exist.  Rather, the visit was seen as highly successful in 
that Wolfowitz has a fuller understanding and appreciation of 
the PBS program and the environment in which it will be 
implemented.  For the World Bank, the PBS program represents 
an opportunity to build on recent positive momentum in the 
political and economic spheres in terms of increasing 
accountability, transparency, and good governance  Enhancing 
civil society's role in the development process will be a 
critical aspect of the program's success, and a leading 
challenge.  The fact that the Ministers of Capacity Building, 
Finance/Economic Development, and Agricultural/Rural 
Development plan to visit various woredas (districts) during 
August and September to advocate and educate local 
administrators about PBS is an indication that, at the policy 
level, the GOE has also bought-in to the PBS concept.  END 
COMMENT. 
HUDDLESTON