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DE RUEHDS #1908/01 2181019
ZNR UUUUU ZZH
P 061019Z AUG 09
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC PRIORITY 5795
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RUEHNR/AMEMBASSY NAIROBI PRIORITY 4018
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 0204
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RUEWMFD/HQ USAFRICOM STUTTGART GE PRIORITY
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UNCLAS SECTION 01 OF 03 ADDIS ABABA 001908 
 
SENSITIVE 
SIPDIS 
 
DEPT PASS TO SENATE FINANCE COMMITTEE FOR AMBER COTTLE AND 
AYESHA KHANNA, ALSO USTR FOR LUIS JIMENEZ 
NAIROBI PASS TO CHELSEA THOMAS 
 
E.O. 12958: N/A 
TAGS: OTRA ECON ETRD EAID PGOV ET
SUBJECT: SCENESETTER FOR STAFFDEL THOMAS VISIT TO ETHIOPIA 
 
REF: STATE 78923 
 
SUMMARY 
------- 
 
¶1. (SBU) Your visit to Addis Ababa comes at a challenging 
time for the Ethiopian economy.  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.  The global economic downturn has only 
exacerbated the economy's own challenges.  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.  End Summary. 
 
GENERAL OVERVIEW OF THE ECONOMY 
------------------------------- 
 
¶2. (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. 
 
¶3. (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. 
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. 
 
THE GOVERNMENT'S ROLE IN THE ECONOMY 
------------------------------------ 
 
¶4. (SBU) Since the early 1990's, Ethiopia has pursued a 
development strategy based on a mixed economy of both state 
and private enterprises.  While the private sector role is 
expanding, the state remains heavily involved in most 
economic sectors and parastatal and ruling-party affiliated 
companies continue to dominate trade and industry, hampering 
full and free competition.  All land in the country remains 
state owned, although long-term leasing arrangements and 
rural land registration for farmers have improved in recent 
years.  Foreign investment restrictions are widespread, 
including key sectors such as banking, insurance, and 
telecommunications.  The state-owned Ethiopian 
 
ADDIS ABAB 00001908  002 OF 003 
 
 
Telecommunications Corporation (ETC) is the only service 
provider in the sector, creating an environment of poor 
telecom service and access.  In a country of nearly 80 
million people, there are only 920,000 fixed phone lines, 1.8 
million cell phones, and 29,000 internet connections.  The 
GoE maintains a hard line stance on these key sectors, but 
some eventual liberalization may take place as part of the 
ongoing World Trade Organization (WTO) accession negotiation. 
 
¶5. (SBU) 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. 
 
A FUNDAMENTAL MACROECONOMIC IMBALANCE 
------------------------------------- 
 
¶6. (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. 
 
¶7. (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.  Finally, 
 
ADDIS ABAB 00001908  003 OF 003 
 
 
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. 
 
THE DOMESTIC POLITICAL ENVIRONMENT 
---------------------------------- 
 
¶8. (SBU) The May 2005 elections and their aftermath continue 
to weigh heavily on Ethiopia's domestic political scene.  The 
U.S. Embassy has strongly advocated for transparent and open 
national elections in 2010, the next major milestone in 
Ethiopia's democratization process.  2005 saw the opposition 
take 170 seats in the 547 seat national parliament, a 
dramatic increase over the 15 seats they held for the 
previous decade.  While the run-up to these elections was the 
most free and fair in Ethiopia's history, electoral 
irregularities prompted the opposition to launch an organized 
civil disobedience campaign that turned violent when 
confronted by security forces.  These security forces killed 
nearly 200 protesters, detained more than 30,000 suspected 
demonstrators, and arrested most of the opposition 
leadership, charging them with capital crimes ranging from 
treason and genocide to "outrages against the constitution." 
The leaders were tried and found guilty, but pardoned in 
¶2007.  Some of the leaders stayed in Ethiopia, but others 
left and are now advocating for a change of government "by 
any means necessary."  Since 2005, the government has enacted 
laws which limit and restrict party politics, the media, and 
civil society, including a law limiting the ability of civil 
society organizations (NGOs) to receive funding from foreign 
sources and participate in the political process.  The April 
2008 local elections saw the ruling party take over all but 
three of over three million seats.  The next national 
elections are scheduled for May 2010. 
 
U.S. ASSISTANCE TO ETHIOPIA 
--------------------------- 
 
¶9. (SBU) Ethiopia is now the second largest recipient of U.S. 
foreign assistance in sub-Saharan Africa. The preponderance 
of this assistance is humanitarian, including food aid, the 
President's Emergency Plan for AIDS Relief (PEPFAR), the 
Child Survival and Health Program Funds (CSH), of which a 
significant share supplements the Government of Ethiopia 
budget.  Relatively little assistance, about five percent of 
the total, directly contributes to Ethiopia's internal 
economic stability and sustainable growth.  Assistance 
designed to promote economic stability concentrates on 
agricultural development -- particularly in vulnerable, 
conflict-prone areas, in order to achieve food security -- 
and on healthcare services.  Notably, the operating 
environment and transaction costs for non-budgetary foreign 
aid are increasing, as a result of new GoE restrictions on 
non-governmental organization (NGO) implementing partners. 
GONZALES