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FM AMEMBASSY ADDIS ABABA
TO RUEHNR/AMEMBASSY NAIROBI IMMEDIATE 4008
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C O N F I D E N T I A L SECTION 01 OF 04 ADDIS ABABA 001842 
 
SENSITIVE 
SIPDIS 
 
DEPT PASS TO USTR FOR AMBASSADOR KIRK 
NAIROBI PASS TO AMBASSADOR KIRK 
 
E.O. 12958: DECL: 08/02/2019 
TAGS: ECON EAID ETRD PGOV PREL ET
SUBJECT: SCENESETTER FOR USTR AMB. KIRK'S VISIT TO ETHIOPIA 
 
Classified By: Political/Economic Section Chief, Michael C. Gonzales fo 
r reasons 1.4 (b) and (d). 
 
SUMMARY 
------- 
 
¶1. (C) Your visit to Addis Ababa comes at a challenging time 
for the Ethiopian economy.  The economy is punctuated by a 
chronic -- and largely endogenous -- macroeconomic imbalance 
and the government and ruling party's dominance over most 
economic sectors.  The global economic downturn has only 
exacerbated the economy's own challenges.  Average inflation 
stands at 36 percent -- the second highest in Africa, after 
Zimbabwe.  Despite two rounds of devaluation of the Birr by 
10 percent each this year, the real exchange rate remains 
overvalued.  Foreign exchange reserves stand at nearly two 
months of import coverage -- a significant improvement from 
six months ago -- that stems from an imposed stranglehold 
over lending to the private sector.  Real interest rates 
remain strongly negative.  Power-shedding due to inadequate 
electricity generation capacity over the past three months 
has forced manufacturing and a significant portion of 
business activity to slow to a stutter.  While AGOA exports 
have more than doubled since last year, to $18 million, the 
bulk of these are in the "leading sectors" which the 
Ethiopian Government (GoE) has endorsed and liberalized. 
Broader exports have stayed flat, despite projections of 25 
percent growth.  With exports of only $1.5 billion compared 
to nearly $7 billion in imports, Ethiopia's trade imbalance 
is dire and growing. 
 
¶2. (C) With over 100 state-owned enterprises and a roughly 
equivalent number of ruling party-owned enterprises, 
incentives facing GoE officials are heavily skewed against 
allowing competition, particularly foreign competition, in 
the economy.  Ethiopia is sincere in its desire to accede to 
the World Trade Organization (WTO), but is not willing to 
forego state-dominance of the telecommunications or financial 
services sectors.  The GoE is counting on riding its "seventh 
least developed country in the world" status to guilt WTO 
members to refrain from demanding liberalization of these 
sectors despite the clear bottleneck their restrictions pose 
to broader economic growth or expanded trade.  We strongly 
urge you to deliver a clear message to the GoE that, while we 
applaud Ethiopia's growth in AGOA exports, the United States 
is concerned that Ethiopia's openings to investment and 
export growth have been restricted largely to specific 
sectors.  We encourage you to press the GoE to expand 
investment incentives and adopt attractive policies to draw 
investment to new export sectors as well as those geared 
toward domestic consumption.  We also urge you to convey a 
clear message to the GoE that we will be looking for a clear, 
specific, and expeditious plan from them on the opening up of 
the telecommunications and financial services sectors as they 
pursue WTO accession.  End Summary. 
 
GENERAL OVERVIEW OF THE ECONOMY 
------------------------------- 
 
¶3. (SBU) Ethiopia remains one of the poorest countries in the 
world.  In 2008 its Gross Domestic Product (GDP) was 
approximately USD 25.7 billion, with per capita GDP of USD 
¶324.  Chronic cycles of drought, high population growth, 
state and ruling party dominance in numerous commercial 
sectors, inefficient agricultural markets, and ever 
increasing power outages all act to limit Ethiopia's economic 
development.  The agricultural sector comprises 45 percent of 
GDP and employs 85 percent of Ethiopia's 79 million people. 
Although Ethiopia's economy is relatively small, it is 
growing at a fast pace.  The GOE publicly touts that Ethiopia 
has experienced double-digit real GDP growth of over 11 
percent in recent years.  The GoE predicts real GDP growth of 
10 percent this year.  Many institutions, including the World 
Bank and IMF, dispute the GoE's growth statistics, stating 
that Ethiopia's real GDP growth rate will most likely range 
between six and seven percent this year. 
 
¶4. (SBU) Total exports have increased over 20 percent per 
annum on average in the past five years.  Total exports this 
year, remained flat over last year's level of $1.5 billion. 
 
ADDIS ABAB 00001842  002 OF 004 
 
 
Coffee exports -- Ethiopia's major export earner -- are down 
25% from last year.  The GoE blames coffee exporters (who 
were allegedly hoarding supply) for the decline in exports 
and as a result, revoked licenses of six major exporters, 
detained some company owners overnight, closed the warehouses 
of over eighty firms, and confiscated their coffee stocks to 
export directly from the GoE.  Despite historical export 
growth, the country suffers a severe trade deficit year after 
year.  Imports totaled USD 6.8 billion in 2008, creating a 
trade imbalance of USD 5.3 billion.  Ethiopia mainly imports 
machinery, fuel, and consumer goods. 
 
AN ECONOMY BASED IN IDEOLOGY... 
------------------------------- 
 
¶5. (C) The GoE continues to be guided by the ideological 
foundations of the ruling party's sister organization of the 
1980s, the Marxist-Leninist League of Tigray.  Senior ruling 
party officials continue to cite the obligation of the 
government to establish the conditions for the manifestation 
of a workers' class from among the peasantry that will be 
able to guide Ethiopia to become a middle-income country. 
The ruling party certainly views itself as a vanguard party 
whose agricultural-industrialization led development model 
must be driven by the state.  As a result, Ethiopia has over 
100 state-owned enterprises (SOEs) involved in virtually 
every sector from agricultural inputs, to cement, to 
fertilizer, to condominiums, to wheat importation.  As with 
interest rates, the state intervenes actively to ensure that 
commodity prices remain -- to the extent possible -- within 
an acceptable band.  Where prices exceed acceptable limits, 
SOEs intervene to import commodities and dump these on the 
local market to suppress prices. 
 
¶6. (SBU) While the agricultural-industrialization led 
development model is optimally suited for an economy like 
Ethiopia's, following the model of the vanguard party, the 
GoE alone has selected the "leading sectors" in the economy. 
These are: 1) hides, skins, and leather; 2) pulses and 
oilseeds; 3) floriculture and horticulture; 4) textiles; and 
5) coffee.  In these sectors, the GoE has liberalized 
significantly: inviting foreign investment; offering 
attractive investment incentives; and generously allocating 
land, credit, and support.  As a result of opening up such 
sectors -- which are geared toward increasing exports and 
foreign exchange -- these sectors generally have flourished. 
Whereas each new investor in these sectors continues to enjoy 
robust incentives and support, investors interested in doing 
business in other sectors, businesses focused on domestic 
demand, or even entrepreneurial investors in new sectors 
continue to be impeded by near-constant bureaucratic 
obstacles to doing business in Ethiopia.  In many cases, 
sectors are further restricted to Ethiopian investors, and in 
some, to the GoE only.  As a recent sign of potential 
diversification from the leading export sectors, GoE 
officials have begun to mention applying import substitution 
theory as an alternative means to reduce the trade deficit 
and increase foreign exchange reserves. 
 
...AND PRACTICALITY 
------------------- 
 
¶7. (C) While the GoE's formal dominance over the economy is 
apparent, the ruling party's heavy role in the economy 
remains largely in the shadows.  Roughly 100 businesses 
throughout Ethiopia are under the control, and pay dividends 
to, the ruling parties.  Formally registered as companies 
under an umbrella endowment, these companies have no formal 
linkage to the ruling parties.  Still, the leadership of the 
endowment is appointed solely from the top echelon of the 
ruling party's politbureau and party central committee 
members represent the chairmen and boards of directors of 
each company.  These endowments, or party-statals, are just 
as diversified as the SOEs -- and just as protected. 
Endowment companies are the dominant entities in sectors such 
as transportation, retail, travel services, and construction 
materials.  Along with SOEs, they are also dominant among 
breweries, cement factories, tanneries, and banks.  These 
party-statals are estimated to have a combined paid-up 
capital of between $500 million and $1 billion.  Credible 
 
ADDIS ABAB 00001842  003 OF 004 
 
 
reports abound from throughout the private sector of 
preferences granted to these party-statals in terms of access 
to credit, access to restricted foreign exchange, access to 
berths at and trucks from the port, awards for government 
tenders and contracts, and other preferences that further 
impede the success of the broader private sector. 
 
A FUNDAMENTAL MACROECONOMIC IMBALANCE 
------------------------------------- 
 
¶8. (SBU) Against this ideological foundation, state control, 
and skewed incentives, it is no surprise that the Ethiopian 
economy faces a fundamental macroeconomic imbalance.  By 
mandating low interest rates, and representing the dominant 
borrowing force in the country, for years the GoE has ensured 
cheap credit for itself through highly-negative real interest 
rates.  By so enabling excess demand and accommodating it 
with excess liquidity, Ethiopia has seen a spike in inflation 
for the past three years.  Year-on-year inflation peaked in 
August 2008 at 64 percent.  While last year's high prices 
have limited year-on-year inflation now to single digits, the 
12-month average inflation rate remains at 36 percent.  The 
reluctance of the GoE to adjust its fixed peg exchange rate 
to accommodate this inflation has resulted in a real exchange 
rate that was as much as 40 percent overvalued in late-2008. 
The external imbalance which this induced brought foreign 
exchange reserves to a perilously low level of two weeks of 
import coverage.  The resulting crisis forced the GoE to seek 
IMF assistance and advice.  Two rounds each of 10 percent 
devaluation of the Birr (against its U.S. dollar peg) have 
helped re-build reserves, but have come only on the eve of 
IMF Board votes on assistance to Ethiopia. 
 
¶9. (SBU) The exogenous global commodities price shock of 2008 
exacerbated Ethiopia's endogenous economic crisis.  While the 
GoE has become more forthcoming with IMF and World Bank 
officials in opening its books, it is clear that the GoE is 
more willing to meet nominal macroeconomic targets through 
false growth figures and further strangling the private 
sector than in fundamentally addressing the 
ideologically-driven policies that have caused the 
fundamental imbalance.  To suppress inflation and re-build 
foreign exchange reserves, the GoE imposed a credit cap on 
all banks in May, limiting lent-out capital to levels 
prevailing on the day of the directive.  Despite promises to 
permit the repatriation of profits, the central bank does not 
allocate adequate foreign exchange to commercial banks to 
effect such hard currency payments.  To stand by its pledge 
of keeping deficit spending at zero, the GoE initiated a 
fierce crack-down on the private sector to expand state 
revenues.  National and foreign enterprises alike have been 
given previous-year tax bills of up to tens of millions of 
dollars after secret "desk audits."  Some of these come after 
firms had already been audited for the tax year being 
audited.  Finally, with the growing international scrutiny 
over the government's books, the GoE and SOEs are 
increasingly turning to China for soft loans and awarding 
Chinese firms with lucrative contracts -- including many 
which are sole-sourced, non-competed contracts for major 
infrastructure projects.  American firms routinely complain 
that Ethiopia's government monopoly telecommunications system 
is inconsistent and inadequate and the absence of 
international banks only exacerbate the disincentives to 
invest posed by bureaucratic and state-imposed impediments. 
 
HOW YOU CAN HELP 
---------------- 
 
¶10. (C) The GoE routinely relies on its "seventh least 
developed country in the world" status to challenge donors to 
withhold benefits that would normally be contingent on policy 
reforms.  This strategy has largely served the country well 
with donors consistently providing greater aid amounts 
despite structural economic (and political) imbalances.  We 
encourage you to emphasize to GoE officials that while the 
U.S. looks to strengthen bilateral relations and build our 
trade links, we also will look to the GoE to adopt 
appropriate policy reforms to which we hold the rest of the 
world -- particularly when it comes to WTO accession.  You 
may consider noting that while we applaud Ethiopia's growth 
 
ADDIS ABAB 00001842  004 OF 004 
 
 
in AGOA exports, the United States is concerned that 
Ethiopia's openings to investment and export growth have been 
restricted largely to GOE-identified "lead sectors."  A 
message from you encouraging the GoE to expand investment 
incentives and adopt attractive policies to draw investment 
to new sectors that could fill domestic demand as well as 
offer opportunities for export would re-emphasize similar 
messages from academic advisors and the World Bank.  We 
encourage you to convey to the GoE that the U.S. will be 
looking particularly for a clear, specific, and expeditious 
plan from them on the opening up of the telecommunications 
and financial services sectors as they pursue WTO accession. 
Separately, you may consider taking advantage of your media 
roundtable to challenge the business community to echo these 
same messages in their engagements with the GoE. 
GONZALES