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DE RUEHDS #0910/01 0931421
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O 021421Z APR 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0139
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RUEWMFD/HQ USAFRICOM STUTTGART GE PRIORITY
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UNCLAS SECTION 01 OF 03 ADDIS ABABA 000910 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV EAGR ET
SUBJECT: ETHIOPIA: TIGHTER GOVERNMENT OVERSIGHT OF THE 
ECONOMY 
 
 
ADDIS ABAB 00000910  001.2 OF 003 
 
 
SUMMARY 
------- 
 
¶1. (SBU) In his March 18 performance report of the government 
to the House of People's Representatives, Prime Minister 
Meles Zenawi avoided commenting on political, security, or 
foreign policy dynamics focusing his comments instead on the 
state of the economy.  Meles' main points were that the 
Ethiopian economy is essentially healthy, but sustained high 
inflation is "public enemy number one," so the Ethiopian 
government (GoE) is playing an increasingly active role to 
respond.  Meles' argued that to respond to the causes of 
Ethiopian inflation -- namely high world prices, excess 
liquidity in the economy, and backward and cumbersome 
agricultural marketing systems -- the GoE will: 1) continue 
and expand subsidies on food and fuel, 2) take appropriate 
fiscal and monetary policy "measures," 3) encourage the 
people to form "consumer associations" to which the GoE will 
ensure distribution of goods at "reasonable prices" through 
state enterprises, and 4) create a Task Force, composed of 
the federal police, trade ministry, and intelligence service 
to "permanently monitor illicit (business) activity" which 
will rely broadly on public "tip-offs."  While the GoE's 
attention to mounting inflation is certainly needed, policy 
prescription focused overwhelmingly on unsustainable 
government interventions in the economy are neither fiscally 
sustainable or consistent with the slow transformation of GoE 
public statements in recent years that have shed Marxist 
ideology in favor of a model of a developmental state that 
supports a market-oriented economy.  End Summary. 
 
IT'S PARTLY ABOUT WORLD INFLATION... 
------------------------------------ 
 
¶2. (U) Prime Minister Meles began his presentation to 
Parliament by noting that the GoE had set two economic goals 
for the current fiscal year: maintaining an economic growth 
rate of at least 10 percent and increasing exports by at 
least 25 percent.  Meles reported that, to date, the 
Ethiopian economy is on track to register 10.8 percent 
economic growth this year with a 32 percent increase in 
exports over the past eight months.  Despite these 
achievements, the GoE has not been able yet to advance toward 
two additional goals: stabilizing the price of commodities 
and controlling inflation.  The Prime Minister argued that 
there are three major dynamics contributing to the 
approximately 20 percent persistent inflation that Ethiopia 
has seen over the past two years.  First, world prices, 
particularly for steel, cement, grains, and fuel, are at 
historic levels.  Meles attributed this to increased demand 
from China and India, the practice of pricing world oil 
prices in U.S. dollars, and the habit of "exploitative 
businessmen" hoarding supply stocks during periods of price 
peaks.  In response to this challenge, Meles detailed GoE 
efforts to shift toward domestic production, where possible, 
to replace imported items such as crops and cement.  Noting 
that these steps would only yield longer term results, the 
Prime Minister highlighted that the GoE has spent over 4.2 
billion Birr (roughly $500 million) in recent months to 
subsidize fuel and wheat prices, and has eliminated the 
import duty on cement, as short term solutions.  In light of 
the persistent inflationary pressures, Meles stated that the 
GoE had no option but to continue, and expand, the policy of 
subsidization.  In particular, the GoE will continue to 
provide subsidized wheat and edible oil to low income urban 
dwellers.  Rather than expose the public to the shock of 
world oil prices, Meles affirmed that the GoE will continue 
the policy of step-by-step alignment of local and world fuel 
prices.  As a new initiative, the GoE will also now lift the 
Value Added Tax and Turn Over Tax on grains. 
 
...EXACERBATED BY DOMESTIC DYNAMICS 
----------------------------------- 
 
¶3. (U) Meles also noted that the increase in the amount of 
money in circulation in Ethiopia is also a significant 
contributing factor fueling inflation.  Meles 
matter-of-factly acknowledged that negative real interest 
 
ADDIS ABAB 00000910  002.2 OF 003 
 
 
rates (currently roughly negative 14 percent) are 
contributing to excess liquidity in the economy, but at the 
same time argued that the broad profitability of Ethiopian 
businesses means that borrowers are repaying their loans and 
driving up deposits held by banks.  He noted that despite a 
central bank regulation in summer 2007 requiring banks to 
double their reserve requirements from 5 percent to 10 
percent, this intervention had not been fully successful in 
mopping up excess liquidity.  Appearing to pre-emptively 
deflect criticism, Meles flagged that GoE borrowing to cover 
the budget deficit has been maintained at a level of only 2.7 
percent.  He did not, however, specifically address questions 
as to what had caused the excess currency in circulation. 
Without providing specific details, the Prime Minister 
confirmed that the Finance Ministry would "take measures" to 
strengthen National Bank of Ethiopia (NBE, Ethiopia's central 
bank) efforts to restrict the growth of money supply. 
 
¶4. (SBU) Meles also acknowledged the "backward and 
cumbersome" agricultural marketing system as one of the main 
causes of inflation.  Again, without discussing the specific 
challenges of the system in place or how it would be 
rectified, Meles made passing reference to the expected 
opening this year of the long delayed commodities exchange 
before moving on to detail one of the speech's main 
initiatives -- consumer associations.  Again without detail, 
Meles asserted that the GoE will now urge the public to 
organize themselves into "consumer associations" to enable 
them to buy basic goods at reasonable prices.  Meles said 
that the associations would hold elections to provide for 
control by the members.  The GoE's role would be limited to 
"ensuring the distribution of goods to the associations at 
reasonable prices through state enterprises."  The Prime 
Minister did not clarify whether existing state enterprises 
would be sufficient to fill this role or if new parastatals 
would be required. 
 
¶5. (SBU) Meles next moved on to highlight the role of illicit 
businessmen who seek to enrich themselves illegally through 
exploiting market opportunities.  While he refrained from 
invoking his oft-used label of "rent seekers," he was quick 
to chastise those who try to benefit inappropriately from the 
prevailing situation.  Meles noted that the GoE had long 
recognized the challenges and costs of pursuing all cases of 
market exploitation and, as such, had pursued a policy of 
cracking down on the egregious offenders in an effort to set 
an example adequate to induce others to refrain from illegal 
operations.  This approach, Meles lamented, had clearly 
failed.  In response, the GoE is establishing a Task Force, 
composed of the Ministry of Trade and Industry, the Federal 
Police, and the National Security and Intelligence Service to 
"permanently monitor illicit activities" and prosecute all 
serious offenders.  Similar structures would be introduced in 
the regional states and major cities as well.  The Task 
Force, Meles emphasized, would depend heavily on the public 
to provide "tip-offs" about offenders. 
 
COMMENT 
------- 
 
¶6. (SBU) Despite having initially been founded as the 
Marxist-Leninist League of Tigray, and espousing 
heavily-statist economic policies, the ruling Ethiopian 
People's Revolutionary Democratic Front (EPRDF) increasingly 
has adopted public references to market-oriented economic 
reforms in recent years.  Nevertheless, the policy response 
that the Prime Minister presented to tackle the persistent 
challenge of high inflation suggests that the GoE continues 
to be led more by vestiges of this ideological orientation in 
addressing economic challenges than by creating a conducive 
environment for competition to improve market efficiencies. 
While Meles often invoked fuzzy economics around the details, 
his broader arguments pertaining to the causes of high 
Ethiopian inflation were generally sound.  Still, his 
suggestion that conventional western economic thought is 
flawed -- as evidenced by the observed increase in bank 
deposits despite negative real interest rates -- highlights a 
common sentiment held among ruling party hardliners and helps 
 
ADDIS ABAB 00000910  003.2 OF 003 
 
 
explain the government's continued reliance on a strong 
government role in the economy.  The Prime Minister made no 
mention of increasing interest rates to mop up excess 
liquidity or of steps that could rid markets, particularly 
agricultural, of inefficiencies caused by the very state 
enterprises trumpeted or bureaucratic regulations imposing 
trade through middlemen and government approved traders.  It 
is encouraging that the GoE is finally addressing problems 
within Ethiopia's macroeconomic fundamentals, but overbearing 
oversight and micromanagement of the economy present more 
causes for concern than hope for a resolution.  End Comment. 
YAMAMOTO