VZCZCXRO0080
RR RUEHROV
DE RUEHDS #0962/01 0891233
ZNR UUUUU ZZH
R 301233Z MAR 07
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 5374
INFO RUCNIAD/IGAD COLLECTIVE
RUEHNR/AMEMBASSY NAIROBI 2934
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0011

UNCLAS SECTION 01 OF 02 ADDIS ABABA 000962 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV ET
SUBJECT: ETHIOPIA: CENTRAL BANK CITES POSITIVE GROWTH, 
WARNS OF INFLATION, DOUBTS ON WTO ACCESSION 
 
REF: ADDIS ABABA 776 
 
ADDIS ABAB 00000962  001.2 OF 002 
 
 
¶1. (U) SUMMARY.  During his semi-annual report to parliament 
March 22, Governor of the National Bank of Ethiopia (central 
bank) Teklewold Atnafu forecast another year of double-digit 
growth in 2007 and warned that inflation would continue to be 
a major concern.  Teklewold reported that although exports 
reached USD 421 million in the first half of 2007 (a 6 
percent increase over the same period last year), the trade 
deficit widened to USD 1.9 billion.  With regard to 
Ethiopia's ongoing WTO accession, Teklewold said that 
liberalization of the financial sector would be difficult, as 
local banks were not yet positioned to compete with foreign 
competitors.  END SUMMARY. 
 
-------------------------- 
STEADY DOUBLE-DIGIT GROWTH 
-------------------------- 
 
¶2. (U) The governor of the National Bank of Ethiopia (NBE) 
reported to parliament March 22 that Ethiopia's average 
annual real GDP growth for the past three years was 10.7 
percent.  Teklewold said that current fiscal year growth was 
estimated to be 10.1 percent.  He noted that inflation 
reached 13.6 percent at the close of December 2006, and was 
triggered by the country's successive high economic growth. 
According to Teklewold, rising rural income, additional 
micro-finance facilities, growing availability of market 
information, and steady economic growth had caused a 14.6 
percent increase in food prices.  He also cited high oil 
prices and increases in the prices of essential imported 
goods as contributors to inflation.  Teklewold assured 
members of parliament that the country's growing cash 
reserves were not a cause of inflation. 
 
-------------- 
EXPORTS RISING 
-------------- 
 
¶3. (U) Noting that foreign trade expanded due to 
trade-friendly policies instituted by the government, 
Teklewold reported that exports for the first half of 2006/07 
totaled USD 421 million, a 6.1 percent increase from last 
year.  He added that while pulses, leather products, fruits, 
vegetables, and floriculture accounted for a large portion of 
Ethiopia's exports, coffee represented nearly 38 percent of 
all total exports.  Teklewold cautioned, however, that the 
country had only reached 32.5 percent of its annual target of 
USD 1.3 billion.  Total imports, on the other hand, reached 
over USD 2.4 billion, resulting in a trade deficit of USD 1.9 
billion. 
 
------------------------ 
BEARISH ON WTO ACCESSION 
------------------------ 
 
¶4. (U) Asked whether Ethiopia was ready to liberalize its 
financial sector and establish stock and bond markets as 
required under the WTO terms of accession, Teklewold said 
that the government believed that local banks were not yet in 
a position to compete with foreign banks, and establishing 
stock and bond markets was not possible at this time.  He 
explained that developing countries like Ethiopia may take up 
to 10 years to liberalize certain sectors, and that the NBE 
was currently conducting a feasibility study on establishing 
stock and bond markets.  Teklewold added that eventually 
Ethiopia had to open its financial sector to foreign 
competition. 
 
-------------------------- 
CURBING EXCESSIVE RESERVES 
-------------------------- 
 
¶5. (U) Teklewold reported that growing commercial bank cash 
reserves forced the NBE to institute a floor on interest 
rates and a ceiling on government credit.  Additionally, he 
said, the NBE decided to invest in telecommunication services 
projects, rural electrification projects, and expansion of 
the export sector, to reduce excess reserves.  According to 
the governor, reserves declined to USD 735 million at end of 
December 2006, compared with USD 1.2 billion last year. 
 
¶6. (SBU) COMMENT:  The central bank highlighted positive 
macroeconomic indicators, though the governor likely paints 
an overly rosy picture.  The IMF, for instance, has privately 
 
ADDIS ABAB 00000962  002.2 OF 002 
 
 
questioned Ethiopia's reported growth rates (reftel).  The 
poor, middle class, and those on a fixed income bear the 
brunt of rising inflation.  At this stage, inflation poses 
the greatest risk to derailing Ethiopia's continued growth 
and stability.  END COMMENT. 
YAMAMOTO