VZCZCXRO7041
OO RUEHROV
DE RUEHDS #3467/01 3651316
ZNR UUUUU ZZH
O 301316Z DEC 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3260
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UNCLAS SECTION 01 OF 02 ADDIS ABABA 003467 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAID ECON EFIN ET
SUBJECT: ETHIOPIA CLAIMS MINIMAL IMPACT OF GLOBAL FINANCIAL 
CRISIS 
 
REF: A. STATE 134905 
     ¶B. ADDIS 3462 
     ¶C. ADDIS 1850 
 
¶1. (U) In statements to Parliament on October 16 and December 
11, Prime Minister Meles has argued that the Ethiopian 
economy will be largely unaffected by the global financial 
crisis.  Noting with pride that Ethiopia's financial system 
is insulated from global finance -- with foreign financial 
services firms barred from entering the Ethiopian market, 
limiting links to correspondent banking relationships -- 
Meles argued that the crisis will have no direct effect on 
the country's financial sector.  Still, as the country is 
facing its own economic downturn driven by poor macroeconomic 
fundamentals, the global crisis Ethiopia is likely to impact 
-- but not drive -- a downturn this year. 
 
¶2. (U) Indirect impacts of the global financial crisis on 
Ethiopia are likely to be mixed.  As Ethiopia receives 
roughly 40 percent of its budget from foreign transfers from 
international financial institutions and donors -- neither of 
which is likely to reduce significantly in the immediate term 
-- the effects on government expenditures are likely to be 
minimal.  The reduction in demand, both domestic and 
international, however, will likely reduce government 
revenues.  The crisis will also likely spur a reduction in 
foreign direct investment (FDI) across the board.  This will 
be caused both by the loss of net wealth among potential 
investors prompting the cancellation or delay of investments, 
as well as by Ethiopian Government (GoE) responses which turn 
investors away -- such as increasing the role of the state in 
the economy and the difficulties presented in doing business 
by the closed financial system domestically.  The most 
pronounced impact on Ethiopia is expected to be in the loss 
of remittances flowing into the country.  With remittances 
normally accounting for US$ 2 billion, or 10 percent of GDP, 
the loss of remittances, which has already been reported 
anecdotally, will have a potentially large dampening effect 
on growth. 
 
¶3. (U) We assess that the impact of the crisis on trade will 
also be mixed.  While global demand may negatively affect 
Ethiopia's exports, most of these are basic primary products 
facing highly price inelastic demand dynamics.  As the 
Ethiopian Birr is roughly 40 percent overvalued already, yet 
exports are growing, we do not believe that the reduced 
global demand for Ethiopian exports will be adequate to cause 
exports to fall significantly.  The IMF shares this view. 
The downfall in global demand has had, and will likely 
continue to have, a positive impact on world prices of 
Ethiopia's imports which we believe will reduce the import 
bill and trade deficit without reducing significantly the 
actual volume of imports.  Importers will continue to face 
delays in obtaining letters of credit, but this dynamic stems 
more from the structural deficiencies and artificially 
overvalued exchange rate than from the global crisis. 
 
¶4. (U) As Ethiopia is a major recipient of donors' 
development and humanitarian assistance, we do not expect to 
see an appreciable downturn in donor support.  The IMF is 
finalizing a minimal US$50 million "Exogenous Shocks 
Facility" for Ethiopia and the World Bank has engaged the GoE 
on accelerating assistance in response to the country's 
domestic macroeconomic crisis as well as the global crisis. 
The IMF has gone further in actually urging donors to provide 
expeditiously the over US$ 750 million in pledged assistance 
for Ethiopia this fiscal year.  Resolving the crisis for 
Ethiopia, however, requires not just additional aid, but 
structural reforms of the highly-statist economy which may 
not be easily forthcoming. 
 
¶5. (U) In conclusion, Ethiopia is likely to be affected more 
by its own economic crisis stemming from ideologically-based 
economic policies than by the global crisis.  Bilateral and 
multilateral assistance needs are likely to remain massive. 
As reported in Refs B and C, however, simply providing 
additional assistance to Ethiopia will only delay the 
macroeconomic and governance reforms needed.  Instead, for 
both bilateral and multilateral assistance to achieve their 
development objectives, we recommend: 
 
a) An increased and unified "full court press" of dialogue 
bilaterally and through coordination among other major donors 
 
ADDIS ABAB 00003467  002 OF 002 
 
 
and the international financial institutions to hold the GoE 
accountable for ensuring an enabling environment for donor 
partner assistance and facilitating assistance programs; 
 
b) A substantial increase in assistance for agricultural 
development targeting the most vulnerable, conflict-prone, 
and food aid dependent areas; 
 
c) Introduction of formal agreements for all assistance 
programs which explicitly lay out benchmarks of progress and 
reform agreed to by the GoE; and 
 
d) Maintenance of current levels of assistance to implement 
health and education reforms, especially girls' education and 
family planning, as well as for democracy and governance 
programs. 
YAMAMOTO