VZCZCXRO4785
PP RUEHROV
DE RUEHDS #2816/01 2880452
ZNR UUUUU ZZH
P 140452Z OCT 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 2349
INFO RUEPADJ/CJTF HOA PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEKDIA/DIA WASHINGTON DC PRIORITY
RHMFIUU/HQ USCENTCOM MACDILL AFB FL PRIORITY
RUEKJCS/JOINT STAFF WASHINGTON DC PRIORITY
RUCNIAD/IGAD COLLECTIVE

UNCLAS SECTION 01 OF 02 ADDIS ABABA 002816 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV EAGR ET
SUBJECT: GOVERNMENT OF ETHIOPIA LIFTS FUEL SUBSIDY 
 
REF: ADDIS 2800 
 
SUMMARY 
------- 
 
¶1. (U) The government of Ethiopia's (GoE) Council of Ministers 
lifted subsides on domestic fuel prices effective October 4.  The 
move came after the International Monetary Fund (IMF) objected to 
the fuel subsidy before considering a balance of payments loan 
(reftel).  The Council also authorized the Ministry of Trade and 
Industry (MoTI) to revise domestic retail fuel prices monthly, based 
upon international prices.  Accordingly, on October 4 MOTI increased 
domestic kerosene prices by 50.4 percent and diesel prices by 39.4 
percent.  The latest domestic fuel price increases represent one of 
the single largest fuel price increases in the country's history. 
While the move to reduce government interventions in this major 
market is positive, its impact will undoubtedly exacerbate 
inflationary concerns.  End Summary. 
 
BACKGROUND 
---------- 
 
¶2. (U) In the past several years, MoTI has set Ethiopia's domestic 
fuel prices quarterly, and utilized a Fuel Stabilization Fund to 
absorb the shocks of the frequent spikes in world oil prices. 
However, in spite of the modest adjustments that have occurred, the 
GoE has spent nearly USD 800 million subsidizing fuel over the last 
three years.  Before the recent drop in fuel prices over the last 3 
weeks, an economist at the National Bank of Ethiopia (NBE, 
Ethiopia's Central Bank) informed EconOff that the GoE was paying as 
much as USD 50 million every month for a fuel subsidy in order to 
cushion the local market from the record global rise in fuel costs. 
On October 3, the Council of Ministers, surprisingly, approved a 
study on the removal of subsidies on petroleum products.  The 
Council's statement suggested that declining trends in world fuel 
prices justified a decrease in the national fuel subsidy.  The 
Council also authorized MoTI unilaterally to make monthly revisions 
of domestic retail fuel prices in order to synchronize more closely 
with international prices.  Effective October 4, MOTI increased 
domestic retail fuel prices, pushing the retail price of regular 
petrol (benzene) up by 5.6 percent, kerosene by 50.4 percent, diesel 
by 39.4 percent, light fuel oil by 31.7 percent and black fuel oil 
by 26.5 percent.  In line with the fuel price increases, the 
Ministry of Transportation and Communication simultaneously revised 
taxi and cross country bus fares. 
 
EXPECTED IMPACTS OF THE ADJUSTMENT 
---------------------------------- 
 
¶3. (U) The latest fuel price adjustments are the largest ever made 
in Ethiopia at any one time.  Kerosene, heavily used by the urban 
poor for cooking has risen in price by 50.4 percent.  The 39.4 
percent increase in diesel will impact the growing urban working 
class of Ethiopia who rely on mass transit on a daily basis not to 
mention the increased transportation costs which will be passed 
through to consumers broadly.  One minor opposition party called for 
a reversal of the price hike fearing the move's impact on cost of 
living and inflation.  The Amharic language Reporter newspaper also 
criticized the move in an October 8 editorial in which it asserted 
that given Ethiopia is an agrarian economy, the country should have 
been food self sufficient and should have been exporting wheat to 
continue subsidizing fuel instead of transferring the subsidy from 
fuel to wheat.  In addition, the GoE's fuel subsidy was contributing 
to increasing budget deficits, inefficient markets and moreover 
hampering much-needed poverty reduction spending.  The Daily 
Monitor, a local Addis Ababa newspaper, cited residents' concerns 
that fuel price hikes would soon be followed by other goods and 
services increases, thus further compounding the already heightened 
expectations of future inflation. 
 
FUEL SUBSIDY LIFTED AS GOE TIGHTENS FISCAL BELT 
--------------------------------------------- -- 
 
¶4. (U) The GoE has been forced to cut the fuel subsidy in part 
because of the IMF's guidance to tighten its fiscal policy in order 
to rein in inflation and mop up excess liquidity.  In addition, 
soaring current account deficits and the acute lack of foreign 
exchange in the GoE's coffers has made it increasingly difficult to 
maintain the current level of fuel imports.  Reports from the 
Ethiopian Petroleum Enterprise indicated that Ethiopia imported 1.88 
million tons of fuel last fiscal year (ending July 7, 2008) at a 
cost of USD 1.6 billion, representing a 17 percent annual increase. 
The value of merchandise exports during that same period was USD 1.5 
billion, falling short of covering fuel bill costs.  It remains to 
be seen whether the move to cut fuel subsidies will restrain fuel 
imports and change the demands of a booming transport sector that 
has become very reliant on subsidized fuel.  On the other hand, some 
 
ADDIS ABAB 00002816  002 OF 002 
 
 
experts argue that the price hikes will more than likely affect 
consumption patterns among urban poor as most cannot afford to buy 
kerosene at the newly adjusted prices.  It is likely that there will 
be a demand dampening effect for kerosene due to the new policy. 
The urban poor will likely either be more cautious in using kerosene 
or move to alternatives like charcoal, fire wood or a combination of 
both -- each bearing its own environmental impacts.  Car owners may 
stop driving their cars or limit their demand and use public 
transportation.  The question is how significant the change in 
demand will be and how long will it last.  In a July 2008 report, 
the IMF Executive Board advised the GoE to follow a gradual and 
cautious removal of fuel price subsidies to abate inflation and 
address dwindling foreign exchange reserves. 
 
COMMENT 
------- 
 
¶5. (U) The reduction of fuel subsidies is expected to impact 
severely the urban poor and, increasingly, the urban working class. 
A gradual and selective lifting of the subsidies over a longer 
period of time would have softened the blow of the recent and 
dramatic adjustments in fuel prices, but may have also prevented 
positive IMF consideration of balance of payments support.  By 
making this move now, when oil is selling at $90/barrel, the GoE did 
buffer the public from bearing the brunt of $150/barrel prices a few 
weeks ago.  It also establishes a mechanism to adjust prices more 
often now to pass on world price increases to consumers as they 
occur, rather than imposing another large shock later.  It remains 
to be seen how the urban poor react to this price shock, 
particularly on kerosene.  As the country prepares for the main 
harvest in December, which is generally energy and fuel intensive, 
the pressure on domestic fuel costs will only compound already 
galloping inflation, further deteriorating the cost of living.  In 
addition, the soaring current account deficits and fast depleting 
foreign exchange reserves will no doubt force the GoE to continue to 
pass on any future fuel price increase to consumers or to reduce 
dramatically fuel imports.  Post will continue to follow closely 
these developments.  End Comment. 
 
YAMAMOTO