VZCZCXRO6987
PP RUEHROV
DE RUEHDS #3060/01 3150431
ZNR UUUUU ZZH
P 100431Z NOV 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 2678
INFO RUEPADJ/CJTF HOA PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEKDIA/DIA WASHINGTON DC PRIORITY
RUEWMFD/HQ USAFRICOM STUTTGART GE PRIORITY
RUEKJCS/JOINT STAFF WASHINGTON DC PRIORITY
RUEHLMC/MILLENNIUM CHALLENGE CORP  PRIORITY
RUCNIAD/IGAD COLLECTIVE

UNCLAS SECTION 01 OF 03 ADDIS ABABA 003060 
 
DEPARTMENT FOR AF/EPS - ABREITER AND GMALLORY; EEB/IFD/OMA - 
JWINKLER AND EEB/CBA - DWINSTEAD 
DEPARTMENT PASS TO USTR FOR CONNIE HAMILTON, CECILIA KLEIN, AND 
BARBARA GRYNIEWWICZ 
DEPT OF COMMERCE WASHDC FOR ITA BECKY ERKUL 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV EAGR ET
SUBJECT: PROFILE OF ETHIOPIA'S DEBT SUSTAINABILITY 
 
REF: ADDIS 2800 
 
ADDIS ABAB 00003060  001.2 OF 003 
 
 
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SUMMARY 
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¶1. (SBU) Although the government of Ethiopia (GoE) has assumed only 
minimal new official external bilateral and multilateral debt since 
completing two rounds of external debt relief, state-owned 
enterprises (SOE) are accumulating off-budget external (and 
domestic) debt at an alarming rate.  The GoE argues that SOE debt is 
not government debt and does not pose a liability to its already 
strained fiscal budget.  The GoE has made a distinction between 
debts taken on by the state (reflected in the national budget) 
versus off-budget debt accrued by SOEs.  The GoE maintains monopoly 
control over SOE operations and procurement activities and places 
high level government officials on SOE executive boards.  The 
government has authorized SOEs to take on large amounts of debt from 
both domestic and foreign sources in order to fuel massive 
infrastructure development initiatives.  The GoE has essentially 
transferred its historical appetite for external public debt 
financing onto the books of purportedly independent SOEs.  The level 
of SOE debt and GoE fiscal exposure to such debt remains unclear. 
END SUMMARY. 
 
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BACKGROUND 
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¶2. (SBU) Ethiopia reached the completion point under the Heavily 
Indebted Poor Country (HIPC) initiative in 2004 and Multilateral 
Debt Relief Initiative (MDRI) in 2006.  Since the inception of debt 
relief, Ethiopia's current debt picture has demonstrated two 
divergent scenarios: 1) a rapid increase in off-budget debt taken on 
by SOEs, and 2) a steady decrease in on-budget external public debt 
loads.  SOEs have been accumulating debt at a break-neck pace as the 
GoE has channeled state and private resources to SOE coffers in 
order to undertake massive national infrastructure development 
projects.  The GoE has loosely regulated SOE borrowing, allowing its 
own Commercial bank to provide large loans and favorable financing 
terms to SOEs.  As of September 2008, the total stock of outstanding 
SOE domestic debt reached USD 978 million, roughly five percent of 
GDP.  The Ethiopian Electric Power Corporation owns the bulk of this 
domestic debt as a result of issuing coupon bonds to the Commercial 
Bank of Ethiopia.  In addition, the GoE has encouraged external 
private and quasi-private financing from China and India to fund 
major SOE national infrastructure projects.  The total stock and 
financing terms of these deals between SOEs and private foreign 
investors is unclear and GoE interlocutors have refused to claim 
them or disclose balances or terms with us.  According to press 
accounts, post has inferred that the total stock of SOE accumulated 
external debt is in excess of USD 3 billion. 
 
¶3. (SBU) On the other hand, Ethiopia's official external public debt 
load offers a different picture than the soaring SOE debt situation. 
 Prior to debt relief initiatives, Ethiopia's stock of external 
public debt stood at USD 7.4 billion in 2003.  After debt relief, 
according to official statistics, the stock of official external 
public debt declined from 39.6 percent of GDP in 2006 to USD 2.75 
billion or 12 percent of GDP in July 2008.  Of this, multilateral 
debt declined from 32.2 percent of GDP to 6.7 percent while official 
bilateral debt shrunk from 5.1 percent to 4.1 percent and commercial 
loans from 2.3 percent to 1.2 percent in the same period.  The GoE 
has aggressively sought to decrease the stock of its on-budget 
external public debt.  The GoE has attempted to improve official 
budget transparency as it relates to gains from debt relief, by 
implementing a specific budget line item to show gains from debt 
relief.  The IMF assesses that the current level of Ethiopia's 
external public debt has been sustainable as a result of disciplined 
fiscal programs and the rapid growth in export earnings in the last 
several years.  However, there is now an increasing chorus of 
bilateral and multilateral donors who have publicly called for the 
GoE to rein in public sector spending and non-concessional SOE 
financing to support its aggressive infrastructure projects.  A July 
2008 IMF staff report advised the GoE to increasingly rely on 
concessional financing to avoid medium and long-term external debt 
distress. 
 
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SOE DEBT NOT A LIABILTY SAYS GOE 
 
ADDIS ABAB 00003060  002.2 OF 003 
 
 
-------------------------------- 
 
¶4. (SBU) The GoE contends that SOE debt is not a liability.  As a 
result, the GoE has maintained a public veneer of independence from 
SOE activities.  The State Minister for Finance and Economic 
Development, Mekonnen Manyazoel told EmbOffs on September 22 that 
the day-to-day operations and private debts accrued by SOEs like 
Ethiopian Airlines, Ethiopian Telecommunications Corporation (ETC) 
and Ethiopian Electric Power Corporation (EEPCO) are subject to SOE 
shareholder and management review and do not pose a risk to the GoE. 
 The GoE's rationale for allowing the rapid accumulation of debt in 
SOEs is embedded in the notion that SOEs operate independently and 
bear no liability to the state's already tight fiscal budget. 
Nevertheless, the GoE has courted private investors from China and 
India in order to provide debt financing for its SOE infrastructure 
projects.  Additionally, the GoE still maintains monopoly control 
over its SOEs and sits several senior government Ministers or ruling 
party Executive Committee members on the executive boards of SOEs. 
All SOE private financing deals continue to be approved by GoE board 
members, which fall in line with government development targets. 
Over the past two years press reports have highlighted that the GoE 
signed a USD 640 million soft loan with India's EXIM bank to develop 
the domestic sugar sector.  The GoE concurrently authorized ETC to 
sign a USD 2.4 billion vendor financing loan with China's ZTE 
Corporation to modernize and expand Ethiopia's telecom services.Q,lQq6QQQonstruct a 5,000 km railway network 
within the country in the next 8-10 years at an estimated cost of 
USD 5 billion.  The GoE expects foreign contractors to finance 55 
percent of this USD 5 billion project in hard currency loans and 
Ethiopia's banks to provide the remainder of the financing.  While 
it is unlikely that these are the only such external loans to 
Ethiopian SOEs, we do not know whether the USD 3 billion (estimated) 
accumulated debt and the proposed USD 5 billion debt for railway 
network reflects all, the majority, or just a fraction of SOE's 
current and future debt burdens. 
 
¶5. (SBU) Ethiopia's domestic public debt has soared due to heavy SOE 
borrowing from Commercial banks of Ethiopia.   The government's push 
to upgrade the country's physical infrastructure through massive 
investment in SOE ventures has significantly drawn down domestic 
banking resources and strained the country's balance of payments. 
Public domestic debt is now roughly USD 6.0 billion, which is about 
2.5 times the value of that of on-budget external public debt 
(External debt: USD 2.75 billion -  SOE portion unknown).  According 
to the National Bank of Ethiopia, SOEs account for about USD 978 
million (roughly five percent of GDP) of the domestic public debt. 
In 2005/06, the stock of external and domestic public debts as a 
percentage of GDP were relatively even (Domestic debtJ_QRQ5Lby the World Bank, 
heavy SOE borrowing 
remains a significant risk to the GoE's debt sustainability.  The 
fast growing stock of SOE debt obligations as indicated by the 
steady stream of publicized SOE financing deals in the local 
Ethiopian media has not been accurately calculated to date because 
of the lack of transparency in SOE budgets and the GoE's reluctance 
to publicly accept liability for SOE debt. 
 
--------------------------------------- 
 
ADDIS ABAB 00003060  003.2 OF 003 
 
 
DEBT SUSTAINABILTY MAY FAIL STRESS TEST 
--------------------------------------- 
 
¶7. (SBU) Although the IMF has projected Ethiopia's stock of public 
external debt to be moderate, the large financing needs of SOEs, low 
expected FDI inflows, low elasticity of demand for Ethiopian exports 
and fuel inflation may precipitate a return to an unsustainable debt 
scenario.  The Economist Intelligence Unit's (EIU) October 2008 
report alsQ_QA]Qf8jects a sharp increase in 
Ethiopia's debt-to-export ratio and a subsequent potential breach in 
its sustainable debt thresholds, primarily as a result of likely 
less favorable financing terms on future public and SOE debt.  The 
IMF has privately admitted to EconOff that they simply have not had 
the facility or capacity to monitor levels of SOE borrowing and 
financing terms from external sources.  Also, a dip in export growth 
may also push Ethiopia into an unsustainable debt scenario. 
According to the DSA report, in order for the GoE to support this 
current debt sustainability assumption, Ethiopia must maintain a 
baseline GDP growth rate of seven percent over the next four years. 
The IMF projects that debt indicators will worsen if GDP growth 
drops to five percent per annum for the next five years.  The global 
financial crisis, uncertain climatic conditions, and the low-demand 
elasticity for Ethiopian exports remain serious threats to 
double-digit output and export growth. 
 
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COMMENT 
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¶8. (SBU) To date, the GoE has not been able to quell significantly 
its large appetite for heavy domestic and external debt financing in 
its SOEs for its widespread physical infrastructure projects. 
Although it has exercised fiscal prudence in maintaining low levels 
of its official external debt loads since HIPC and MDRI debt relief 
in 2006, the government has essentially redirected most of its new 
debt obligations to SOEs.  The GoE's contention that SOE debt is not 
a public liability seems to run contrary to the fact that the GoE 
controls these SOEs and their ultimate repayment will draw from the 
country's common pot of limited hard currency reserves.  In 
addition, the GoE implicitly assumes the risk of SOE borrowing 
particularly since all major SOE capital expenditures and borrowing 
are approved by the GoE officials who sit on SOE boards.  The GoE 
appears intent to convince itself and the international donor 
community that its strict fiscal tightening with respect to 
on-budget spending and external public debt maintenance is the true 
barometer for assessing its debt sustainability.  It is clear, 
however, that the increasing value and volume of SOE debt cannot be 
reasonably separated from government liabilities, since the GoE in 
fact benefits from the growth and profitability of these same SOEs. 
Also, the GoE's reliance on sustained double digit output and export 
growth to reduce their debt burden hangs on tenuous climatic and 
global economic cycles.  The tricky questions remain: how much 
longer and at what cost can the GoE support the growing SOE debt 
burden and rely on export-led growth to meet its fiscal commitments? 
 END COMMENT. 
 
YAMAMOTO