VZCZCXYZ0011
PP RUEHWEB

DE RUEHDS #1473/01 1750708
ZNR UUUUU ZZH
P 240708Z JUN 09
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC PRIORITY 5218
INFO RUEHBS/USEU BRUSSELS
RUEHGV/USMISSION GENEVA 4499
RUEHLO/AMEMBASSY LONDON 3367
RUEHFR/AMEMBASSY PARIS 1895
RUEHRO/AMEMBASSY ROME 6655
RUCNDT/USMISSION USUN NEW YORK 7868
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS ADDIS ABABA 001473 
 
SIPDIS 
SENSITIVE 
 
STATE DEPARTMENT AF/E, AF/PDPA, OES, AND PRM/AFR 
USAID for AFR EGAST, CTHOMPSON 
LONDON, PARIS, ROME FOR AFRICA WATCHERS 
USMISSION UN ROME FOR RNEWBERG 
NEW YORK FOR DMERCADO 
USEU FOR PBROWN 
GENEVA FOR NKYLOH, RMA 
DEPT OF TREASURY FOR REBECCA KLEIN 
DEPT OF COMMERCE FOR MARIA RIVERO 
 
E.O. 12958: N/A 
TAGS: EAID ECON EAGR PREL PGOV ET
SUBJECT:  ETHIOPIA: IMF DETAILS ECONOMIC PROGRESS AND CONCERNS 
 
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Summary 
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¶1. (SBU) On Saturday June 20, 2009, representatives of the donor 
community were invited to a briefing by the head of the IMF review 
delegation which had been consulting with the Ethiopian government 
over the previous week.  The IMF team was both reviewing progress on 
the agreed macro-economic actions by the government from December, 
as well as planning for the financial support package related to the 
global financial crisis.  The IMF expressed overall satisfaction 
with the performance of the Ethiopian government since December, 
noting that oil products were no longer subsidized due to the 
decline in world prices, that the government had ceased domestic 
borrowing and initiated more control over public enterprise 
borrowing, and that these factors had brought inflation down to 
under 10% from a peak of over 60% in 2008.  However, they expressed 
concern about monetary growth, poor tax performance and declines in 
the real rates of economic growth (as opposed to the official 
rates).  The total package of support from the IMF has yet to be 
finalized, but initial support from the Economic Stabilization Fund 
(ESF) is expected to be in the $250 million range (not including the 
new, non-conditional access of Ethiopia to Special Drawing Rights of 
about $480 million).  This takes place against a background of the 
Ethiopian PM pressing for less conditionality for donor support, 
while resisting structural changes to address underlying economic 
problems. 
 
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Background 
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¶2. (U)There has been a high level of concern about Ethiopia's 
macro-economic conditions for the last two years, as inflation 
escalated (mainly due to domestic issues such as rise in grain 
prices and high government borrowing and expenditure), the balance 
of payments grew worse, and foreign currency reserves dropped to 
less than six weeks of imports.  Agreements were reached with the 
government after an IMF mission in December 2008 which included a 
number of stabilization initiatives to reduce inflation and increase 
the foreign currency reserves.  Although the IMF recognized that 
these issues were driven by structural problems, they argued that 
their mandate focused them exclusively on stabilization issues.  It 
would be the responsibility of the World Bank and other donors to 
tackle structural issues such as the balance of payments problem. 
 
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IMF Briefing 
------------ 
 
¶3. (U) Sean Nolan, the head of the IMF delegation, along with IMF 
Country Director Sukhwinder Singh, briefed a group of about twenty 
donors, including Ambassador Donald Yamamoto and Acting Mission 
Director for USAID Nancy Estes. 
 
¶4. (U) He opened with a briefing on the global financial crisis 
response, which provided an extra credit line from the Special 
Drawing Rights (SDR's) for member countries of IMF (which amounts to 
$480 million for Ethiopia) and a planned trebling of loans to 
developing countries.   While much of the attention for the response 
was focused on Eastern European countries, there was a conscious 
effort to ensure African countries were not left out. 
 
¶5. (U) The macro-economic situation in Ethiopia has improved in his 
opinion, with a marked decrease in inflation to 4-5% in June from 
over 12% in the month of June alone last year.  Official annual 
growth is forecast at 10% for 2009-10, but the IMF has a more 
conservative estimate of 7%.  Exports are expected to be flat while 
imports will grow, remittances are stagnating rather than 
decreasing.  The Government of Ethiopia (GOE) has met most of the 
requirements under the agreement on stabilization such as market 
level prices for oil and no domestic government borrowing, but the 
degree to which borrowing by public enterprises and monetary growth 
are really under control is still questionable.  The GOE strongly 
accepts the need to keep inflation down, but is reluctant to reduce 
spending, especially on the large poverty reduction budget. 
 
¶6. (U) Sean Nolan was reluctant to spell out the degree of support 
that the IMF would be negotiating with the GOE.   The Economic 
Stabilization Fund (ESF) support was determined largely by the 
degree of economic shock each country went through, and the official 
figures are not that bad in Ethiopia.  Ethiopia is eligible for at 
least $250 million under the IMF formula, and further amounts were 
also probable (in tranches linked to stabilization indicators). 
 
¶7. (U) He finished the briefing with an appeal to donors to support 
work on three issues: 
 
1) Tight control over borrowing by public enterprises.   Oversight 
is needed on borrowing by the State Oil Company, Electric Company, 
Telecommunications Corporation especially, all of which have 
borrowed heavily in the past. 
 
2) Central Bank control over the currency - especially using better 
treasury borrowing mechanisms such as bonds. 
 
3) Improved tax collection.  There was very poor performance of 
taxation against GDP.  Taxes were generally high, but there were 
many exemptions.  Petroleum tax is very low, but could be a cash cow 
for the GOE. 
 
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Discussion 
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¶8. (U) Considerable skepticism was voiced on the projected economic 
growth rate given the problems with all of the 'drivers of growth'. 
With reduced demand and prices for exports such as coffee and 
flowers, stagnating or declining remittances and foreign investment, 
and restricted increases in government expenditures, where is the 
growth going to be fuelled from, even at the reduced 7% level? 
 
¶9. (U) Questions were also raised about the currency exchange rate, 
with devaluation also part of the December agreement between the IMF 
and GOE.   While there has been a devaluation of 10% early in 2009, 
and gradual devaluation since, the real exchange rate for the 
Ethiopian birr has still been rising and black market rates 
increasing rapidly.  Sean Nolan declined to talk about his 
discussions on currency exchange with the government, but hinted 
there was no major pressure for devaluation. 
 
¶10. (U) Donors were very curious about the size, timing, and 
conditionality of upcoming IMF support, but there was no further 
information provided. 
 
¶11. (U) The continued decline in inflation predicted by the 
government and supported by the IMF was also questioned.   Official 
grain production in Ethiopia had increased by 8%, which strained 
credibility in a poor rainfall year (general sense that there was no 
or very little increase in food production in 2008).  While the 
government had taken measures to stem food inflation, such as 
stockpiling and elimination of credit purchasing by private grain 
traders, the rise in demand against stagnant supply could overwhelm 
these measures and cause higher food inflation. 
 
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Comment 
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¶12. (SBU) The IMF generally painted a good news picture of Ethiopia, 
but there were underlying concerns which the IMF did not address. 
While the government has acted positively on issues related to the 
immediate stabilization, such as reducing inflationary pressure from 
money supply and government expenditures, they were resisting 
tackling structural issues.  Most of the most critical issues - 
exchange rate, banking, stock exchange, extra budgetary borrowing 
and land policy - are being resisted.   A good donor dialogue is 
needed on these issues, which must be inclusive of USG and not just 
left to the World Bank and IMF.  End Comment. 
 
YAMAMOTO