VZCZCXRO3690
PP RUEHROV
DE RUEHDS #0798/01 0991223
ZNR UUUUU ZZH
P 091223Z APR 09
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 4328
INFO RUEPADJ/CJTF HOA PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEKDIA/DIA WASHINGTON DC PRIORITY
RHMFIUU/HQ USCENTCOM MACDILL AFB FL PRIORITY
RUEWMFD/HQ USAFRICOM STUTTGART GE PRIORITY
RUEKJCS/JOINT STAFF WASHINGTON DC PRIORITY
RUEHLMC/MILLENNIUM CHALLENGE CORP  PRIORITY
RUCNIAD/IGAD COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 ADDIS ABABA 000798 
 
SIPDIS 
SENSITIVE 
 
DEPARTMENT FOR EEB/IFD/OMA - JWINKLER AND EEB/CBA - DWINSTEAD 
 
DEPT OF TREASURY WASHDC FOR ANDY BAUKOL, DANIEL PETERS, REBECCA 
KLEIN 
 
E.O. 12958: N/A 
TAGS: BEXP ECON EFIN ETRD EINV EAGR ET
SUBJECT: TREASURY FINDS AN ETHIOPIA MORE RELIANT ON AID THAN REFORM 
 
REF: A) 2008 ADDIS ABABA 675 
B) 2008 ADDIS ABABA 02569 
 
ADDIS ABAB 00000798  001.2 OF 003 
 
 
SENSITIVE BUT UNCLASSIFIED; BUSINESS PROPREITARY INFORMATION; NOT 
FOR INTERNET DISTRIBUTION 
 
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SUMMARY 
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¶1. (SBU) In a March 12 visit to Ethiopia, Acting Assistant Secretary 
of Treasury, Andy Baukol, found a Government of Ethiopia (GoE) that 
has become more vocal about its need for sustained aid flows from 
the West and more recalcitrant about implementing any reforms or 
liberalization of key sectors such as banking and 
telecommunications.  Baukol noted that without reforms and 
adjustment, Ethiopia was unlikely to resolve a balance of payments 
crisis of its own making and could likely face a deeper and longer 
recession than the broad global recession.  GoE interlocutors 
responded defensively by arguing that the World Bank (Bank) and 
International Monetary Fund (IMF) do not know the right economic 
policies and should just provide faster, unconditioned aid to 
bolster Ethiopia's proven record of strong growth.  Despite the 
rhetoric, the GoE meetings made clear that the GoE has not developed 
any sort of domestic plan or fiscal solution, besides reliance on 
external aid, to offset the effects of the global financial crisis. 
END SUMMARY. 
 
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ECONOMIC SLUMP IS WEST'S FAULT SAYS GOE 
--------------------------------------- 
 
¶2. (SBU) In response to Baukol's inquiry into the effects of the 
global crisis on the Ethiopian economy, Minister-ranked Chief 
Economic Advisor to the Prime Minister Newaye Gebre-ab argued that 
Ethiopia's closed banking system somewhat insulated the country from 
the banking debacle around the world.  Still, Newaye conceded that 
Ethiopia has already started to feel the "second order" effects of 
the global crisis, as heavy declines in coffee exports have been 
registered.  The Treasury officials emphasized reform, particularly 
in banking and telecommunications, as a potential avenue for 
Ethiopia to offset the impact of the global recession on its exposed 
export sectors.  Despite this advice, Newaye made clear that 
Ethiopia was committed to maintaining its status quo economic 
principles (particularly regarding the closed banking and 
telecommunications sectors), largely discounting the reform message. 
 Newaye argued that the West's key role in precipitating the 
economic turmoil would unfairly penalize Ethiopia and other African 
countries that remain innocent bystanders in the current crisis, and 
suggested, therefore, that the West has an obligation to provide 
relief.  Newaye explained that Africa would have to bear an 
asymmetrical burden as "second order" effects of the crisis 
eventually collapse trade in commodities and jeopardize aid to 
Africa.  Newaye lamented that Ethiopia and Africa's unfavorable 
economic circumstances resulted from flawed Western economic 
principles and excesses which ultimately led to the crisis. 
 
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AID NOW, NOT LATER 
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¶3. (SBU) Although Newaye blamed the West for Africa's current 
economic problems, he remained fervently committed to Ethiopia's 
position that aid should be sustained to Africa amid the economic 
crisis.  Aid is key over the short- and medium-term for Ethiopia to 
emerge unscathed from the current global recession.  He contended 
that the money Ethiopia and Africa needed to survive the downturn 
would be a trifle compared to the recent rounds of stimuli and 
bailouts seen in the U.S. and Europe.  He suggested that the 
marginal returns that the many rounds of stimuli had provided in the 
West would have generated significantly higher returns in Africa for 
a fraction of the cost.  Newaye openly asked the Treasury officials 
what it would take for Ethiopia to achieve a minimum level of 
support from the West to maintain aid and prop up trade.  He 
contended that the West needed to scale down its reform-oriented 
rhetoric and, moreover, treat Ethiopia and Africa with a bit more 
modesty and fairness during the crisis, particularly since they 
 
ADDIS ABAB 00000798  002.2 OF 003 
 
 
(Africans) are not to blame for the current crisis. 
 
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ETHIOPIA'S PERFORMANCE ALONE WARRANTS AID 
----------------------------------------- 
 
¶4. (SBU) The overriding consensus from GoE interlocutors was that 
Ethiopia's stellar economic performance over the last 15 years 
warrants increased support through quickly-disbursed, unconditioned 
aid.  Newaye explicitly argued that the World Bank and IMF "do not 
know what the right economic policies are."  He explained that the 
quick disbursement of aid would be the stimulus that would keep 
Ethiopia's economy growing at the government professed levels of 11 
percent during the global downturn.  (Note: Although the GoE is 
adamant in perpetuating the myth of sustained 11 percent annual 
growth for the past five years, the assessments shared by us, the 
IMF and World Bank internally, is that growth has been closer to 
seven to eight percent. End Note.)  Moreover, the Minister explained 
that Ethiopia has come close to meeting many of its development 
goals.  He argued that this resulted from the GoE's strong economic 
policies and that much of these gains would have been undermined if 
Ethiopia had adopted policy recommendations from the Bank or IMF 
earlier.  In a separate meeting with the Treasury delegation, State 
Minister for Finance Mekonnen Manyazewal also echoed Ethiopia's 
previous stellar economic performance as a real benchmark for 
progress and achievement of development goals. 
 
¶5. (SBU) Minister Newaye said that "although the GoE remains 
sensitive to the USG's comments and advice on reform, it requests 
that the USG suspend judgment about Ethiopia's perceived policy or 
economic shortfalls and focus merely on its real progress over the 
long term."  Newaye explained that the GoE is open to real policy 
reforms in the future in order to stabilize and grow its economy. 
The Minister did not elucidate the type or manner of reforms when 
queried by the Treasury officials.  However, he did say that any 
reforms would need to follow a workable timeline and the government 
would need enabling institutions in order to support policy shifts. 
Interestingly, the Minister's main argument of increased aid, 
without conditions, was buttressed by his claim that Ethiopia is 
looking to limit its reliance on India and China for soft loans. 
The Minister contended that the GoE would rather avail itself of the 
IMF and World Bank facilities than rely solely on the Chinese and 
Indians for external financing. 
 
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PRIVATE SECTOR AND DONOR RESPONSE MIXED 
--------------------------------------- 
 
¶6. (SBU) Over lunch with private sector representatives, 
participants argued that Ethiopia still remains attractive for 
investment opportunities.  However, the private sector has become 
increasingly concerned about the acute foreign exchange crisis and 
the perception of Washington's diminishing role and participation in 
Ethiopia and Africa's economic development.  One individual 
referenced the recent announcement by China to establish a USD 5 
billion sovereign fund for Africa's development.  They asked why 
Washington was not looking at establishing a program similar to the 
Chinese fund.  Although, the private sector officials at the lunch 
recognized that the foreign currency crisis was choking the domestic 
economy, some privately intimated that it was a good wakeup call for 
the GoE. 
 
¶7. (SBU) In contrast, Ambassadors from major donor nations painted a 
picture of an Ethiopian economy in more dire straits.  Pointing to 
sustained negative real interest rates, the second-highest rate of 
inflation in Africa, and foreign exchange reserves capable of 
covering only four weeks of imports, the assembled diplomats 
stressed the need for the GoE to release its tight control of the 
economy.  In particular, donor Ambassadors noted the need to create 
a conducive environment for investment beyond Ethiopia's traditional 
sectors and to liberalize the foreign exchange regime to avoid the 
perpetuation of the current crisis.  Participants showed consensus 
in their views that the closed financial services and 
telecommunications sectors detract particularly from Ethiopia's 
ability to attract foreign investment and the dominance of state- 
and party- owned enterprises in the economy further stymie the 
development of a robust private sector. 
 
ADDIS ABAB 00000798  003.2 OF 003 
 
 
 
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COMMENT 
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¶8. (SBU) The GoE's resistance to medium or long-term economic 
reforms or benchmarks in order to offset negative impacts of the 
global financial crisis only makes worse an already dire economic 
situation in Ethiopia as inflation remains significantly double 
digit and the government reels from a severe balance of payments 
crisis.  Additionally, with the recent production halt of Coca Cola 
in Ethiopia (Ref A) as a result of the country's forex crisis (Ref 
B), it is not clear if the GoE understands the severity of the 
global financial crisis' deleterious effects on foreign direct 
investment and economic growth prospects in Ethiopia. 
 
¶9. (SBU) Despite Ethiopia's clear challenges, the GoE is lauding the 
recent pledges by the G-20 to increase the IMF's lending capacity 
and flexible financing regime without conditions or requiring real 
reforms as a victory.  Public statements suggest that the GoE sees 
the G-20's pledges as a validation of their previous economic 
policies, where absolute performance, not long-term reform, reigns. 
Some GoE officials believe that Ethiopia is poised to receive USD 
400 million from the IMF and significantly increased assistance from 
the Bank without adopting macroeconomic reforms.  We know that 
economic growth and performance figures have been grossly inflated 
by the GoE, the country's macroeconomic imbalances are endogenous, 
and the GoE does not have a clear strategy to correct them.  As 
such, although the IMF's increased lending capacity and flexible 
financing programs will spur growth in the short-term in Ethiopia, 
we believe that more, faster, and unconditioned aid to Ethiopia will 
only serve as a band-aid, deferring the much needed macroeconomic 
adjustments to another day.  To advance the U.S. objective of 
promoting sustainable economic prosperity, our bilateral assistance, 
and our votes on assistance from multilateral sources, should 
continue to be linked to, and contingent upon, economic policy 
reforms and performance indicators.  END COMMENT. 
 
YAMAMOTO