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Viewing cable 09ADDISABABA2763, ETHIOPIA: ECONOMIC HIGHLIGHTS NOVEMBER 2009

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Reference ID Created Released Classification Origin
09ADDISABABA2763 2009-11-23 13:18 2011-08-26 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Addis Ababa
VZCZCXRO5845
PP RUEHROV
DE RUEHDS #2763/01 3271318
ZNR UUUUU ZZH
P 231318Z NOV 09
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 6899
INFO RUEPADJ/CJTF HOA PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEKDIA/DIA WASHINGTON DC 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 002763 
 
SIPDIS 
SENSITIVE 
 
DEPARTMENT FOR EEB/IFD/OMA - JWINKLER AND EEB/CBA - DWINSTEAD 
DEPT PASS TO U.S. PATENT AND TRADEMARK OFFICE - AMY COTTON 
DEPT PASS TO USTR FOR PATRICK COLEMAN, CECILIA KLEIN, AND BARBARA 
GRYNIEWWICZ 
DEPT OF COMMERCE WASHDC FOR ITA MARIA RIVERO 
DEPT OF TREASURY WASHDC FOR REBECCA KLEIN 
USAID FOR AFR/EA - HELLYER, DALTON, AFR/SD - CURTIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV ET
SUBJECT: ETHIOPIA: ECONOMIC HIGHLIGHTS NOVEMBER 2009 
 
ADDIS ABAB 00002763  001.2 OF 003 
 
 
SENSITIVE BUT UNCLASSIFIED; NOT FOR INTERNET DISTRIBUTION 
 
1. (SBU) SUMMARY:  Recent economic highlights in Ethiopia include: 
1) Government of Ethiopia (GoE) claims 10 percent Gross Domestic 
Product (GDP) growth for fiscal year 2008/09; 2) Falling inflation 
rates; 3) Birr still overvalued at 12.59 per USD alongside 
continuing foreign exchange crunch; 4) Widening trade deficit; and 
5) Electricity supply boosted by three new plants.  President Girma 
Woldegiorgis announced Ethiopia's 10 percent GDP growth to 
Parliament amid doubts expressed by international economists as well 
as opposition party members about how Ethiopia could have attained 
such high growth given tough economic times locally and abroad. 
Annual year-on-year inflation rates have tumbled into the negative 
percentages--negative 3.7 percent in October 2009--in comparison to 
the exorbitant rates of 2008 (64 percent in July 2008).  Annual 
average inflation is 14 percent as of October 2009.  The Ethiopian 
Birr is trading at 12.59 per USD, but is still overvalued according 
to the International Monetary Fund (IMF).  The foreign exchange 
crisis continues to plague the country as the trade deficit 
continues to widen and Ethiopia continues to fall short of its own 
export targets.  Export growth was flat in 2008/09 compared to 
2007/08, but imports continued to rise.  Total exports were USD 1.4 
billion in 2008/09 and total imports were USD 7.7 billion, creating 
a trade deficit of USD 6.3 billion.  Finally, the power supply 
crisis has abated somewhat as the rainy season has ended (filling 
the dams).  The Tekeze Hydro Electric dam officially came online in 
mid-November and two new hydro power plants will be online by March 
2010.  END SUMMARY. 
 
10 Percent GDP Growth? 
---------------------- 
 
2. (U) On October 5, President Girma Woldegiorgis reported to 
Parliament that Ethiopia's economy grew at 10.1 percent during the 
2008/09 fiscal year (ending July 7, 2009).  He suggested, but 
stopped short of predicting, government policies would succeed in 
achieving the same economic feat in the upcoming year as well. 
Woldegiorgis stated two main GoE objectives for the 2009/10 fiscal 
year:  1) achieving 10 percent GDP growth rate for the seventh 
consecutive year; and 2) maintaining inflation rates less than 10 
percent.  According to the GoE, Ethiopia's average real GDP growth 
was 11.5 percent during the past six years. 
 
3. (U) International economists and Ethiopia's political opposition 
have cast doubt on the high GDP growth figures for this past fiscal 
year.  The IMF stated publicly it believes GDP growth was 
approximately 7 to 8 percent in fiscal year 2008/09 and will likely 
be around 7 percent in 2009/10.  Ken Ohashi, World Bank Country 
Director for Ethiopia and Sudan, argued in a locally published 
article Ethiopia's growth "miracle" has run into difficulties since 
2008 due to high inflation and an acute shortage of foreign 
exchange.  He noted that while inflation, which peaked at 64 percent 
in July 2008, has moderated, there are few signs that the shortage 
of foreign exchange is abating.  Opposition party members also 
rejected President Girma's stated figures.  Prominent opposition 
leader Merera Gudina accused the GoE of "cooking" the data.  He said 
average Ethiopians would know the figures were false because their 
standard of living has failed to improve. 
 
4. (SBU) Comment:  GDP growth of 10 percent seems unlikely given the 
economic hardships Ethiopia endured this past year.  On top of the 
global financial crisis and the decline in key exports such as 
coffee, poor rains crippled the dominant agriculture sector, lack of 
power generation forced partial shutdown of factories, and the acute 
shortage of foreign exchange persisted with no end in sight.  End 
Comment. 
 
Tumbling Inflation Rates 
------------------------ 
 
5. (U) According to Ethiopia's Central Statistics Agency, annual 
year-on-year inflation sharply declined to -3.7 percent in October 
2009 down from a record high of 64.2 percent in July 2008. 
Similarly, annual average inflation tumbled to 14.1 percent in 
October from a record high of 46.2 percent in February 2009.  Annual 
 
ADDIS ABAB 00002763  002.2 OF 003 
 
 
food and cereals inflation rates fell to -12.8 and -27.4 percent in 
October 2009, respectively, down from record highs of 91.8 and 171.9 
percent in July 2008.  Food items account for over half of the 
weight in the consumer price index, so overall inflation trends are 
closely tied to the seasonality of cereal production.  Factors that 
contributed to the decline in inflation include the GoE's tightening 
of fiscal and monetary policy in late 2008, the importation of 
wheat, and a properous cereals harvest during November and December 
2008.  A recent IMF report stated that although high food price 
volatility and stubborn non-food price inflation are significant 
risks in Ethiopia, single digit inflation looks to be achievable in 
the current fiscal year. 
 
6. (SBU) Comment:  Although annual inflation rates have sharply 
declined in the past few months, prices are still significantly 
higher compared to two years ago and food prices are expected to 
rise again in early 2010 due to forecasted food shortages.  Overall, 
food, and cereals inflation rates, respectively, were 55.3 percent, 
61.4 percent and 103.9 percent higher when compared to two years 
ago.  In addition, Ethiopians are increasingly feeling the pinch of 
rising fuel prices ever since the GoE lifted its fuel subsidy in 
October 2008.  Gas prices hit 12.39 Birr per liter (USD 3.72 per 
gallon) in October 2009, up over 65 percent (in Birr terms) from 
just six months ago.  Gas prices were 7.47 Birr per liter (USD 2.53 
per gallon) in April 2009.  End Comment. 
 
Birr Still Overvalued; Forex Crunch Continues 
--------------------------------------------- 
 
7. (SBU) The Ethiopian Birr is now trading at 12.59 per USD, 
demonstrating a 26 percent depreciation in the past nine months. 
The spread between the official and parallel market rate has 
narrowed to 5 percent in contrast to 20 percent in 2008.  The IMF 
believes the Birr is still overvalued and that Ethiopia faces a 
difficult external environment in 2009/10.  The IMF's estimate on 
the level of Ethiopia's foreign currency (forex) reserves suggest a 
troubling outlook for the country's balance of payments as the 
global recession continues to take a toll on remittances, exports, 
foreign direct investment, oil prices, and official development 
assistance.  The current level of forex reserves stands at USD 1.8 
billion, up from a record low of about USD 700 million at the end of 
2008.  The IMF estimates forex reserves will shrink by USD 250 
million in the coming months which will reverse one-half of the 
reserve rebuilding achieved in fiscal year 2008/09. 
 
8. (SBU) Comment:  Further depreciation of the Birr in the current 
fiscal year is expected, but the Birr should not devalue much beyond 
14-15 Birr/USD.  The narrowing spread between the official and 
parallel exchange rates is explained by the fact that the Birr is 
getting closer to a market-balanced exchange rate and the GoE's 
crackdown on black market traders.  The lack of forex continues to 
constrain private sector development and the GoE's ability to handle 
adverse shocks to the economy.  The recently approved USD 241 
million Exogenous Shocks Facility (ESF) IMF loan will boost forex 
inflows and help reserves recover in the short term; however, the 
GoE needs a long-term strategy to address this critical problem. 
End Comment. 
 
Widening Trade Deficit 
---------------------- 
 
9. (SBU) Ethiopia's exports totaled only 1.4 billion in fiscal year 
2008/09, missing the USD 2.5 billion target by over 40 percent. 
Exports actually decreased slightly from the 2007/08 year of 1.5 
billion.  Coffee exports--Ethiopia's major export earner--were down 
28 percent from last year in terms of value and coffee's share of 
total exports shrunk from 35 to 26 percent.  The GoE blames domestic 
marketing problems and the decline in world commodity prices as 
causes for the slash in coffee export earnings.  On the other hand, 
total imports were valued at USD 7.7 billion during 2008/09, an 
annual increase of 14 percent.  Capital goods imported accounted for 
USD 2.5 billion or 32 percent of the total, followed by consumer 
goods of USD 2.3 billion, and fuel of USD 1.3 billion.  Therefore, 
the trade deficit widened to USD 6.3 billion in 2008/09, in contrast 
to USD 5.3 billion in the preceding year.  The IMF attributed the 
 
ADDIS ABAB 00002763  003.2 OF 003 
 
 
ballooning trade and balance of payments deficits primarily to an 
increase in public sector spending.  Despite the poor export 
performance in 2008/09, the GoE set an ambitious export goal of USD 
2.9 billion for fiscal year 2009/10.  Ethiopia has already missed 
the first quarter mark by 31 percent, earning only USD 343 million 
compared to the USD 496 million projection. 
 
10. (SBU) Comment:  The newly-established Ethiopia Commodity 
Exchange (ECX) created a variety of logistical problems for both 
buyers and sellers in the industry during the past year.  ECX has 
worked hard to resolve these issues and a bumper coffee harvest is 
expected this year.  Coffee as well as other exports, however, still 
faces serious risks from any global economic downturn and the threat 
of drought.  The GoE is not only working to boost exports from a 
variety of sectors, but it is finally beginning to entertain 
discussions of import substitution as a means to reduce the trade 
deficit.  It is not clear at this time which, if any, priority 
sectors for import substitution the GoE will identify.  End 
Comment. 
 
Power Supply Boosted By Three New Plants 
---------------------------------------- 
 
11. (U) Three new hydroelectric power plants are set to generate 
over 1000 megawatts (MW) of electricity to address the chronic power 
shortages across Ethiopia.  Tekeze Hydro Electric power plant held 
its inaugural ceremony on November 14 and it has a 300 MW capacity. 
Two other plants, Tana Beles and Gilgel Gibe II, are nearly complete 
and will begin generating power by March 2010. 
 
12. (SBU) The chronic power outages of early 2009 abated somewhat 
towards the end of the rainy season in September/October, as many 
hydro power dams filled with water.  Periodic power outages do 
continue though, as demand continues to outpace supply.  CDA Meece 
and post's Regional Environmental Officer attended the November 14 
onsite ceremony at Tekeze Dam in remote northern Ethiopia to 
highlight U.S. Company MWH's involvement in the design of the dam. 
CDA Meece's speech received positive press coverage highlighting 
U.S. involvement alongside Chinese company involvement in the 
construction.  The Tekeze dam is currently generating only 75 MW of 
its 300 MW capacity.  GoE officials claim water levels are 
sufficient to operate the plant at full capacity, however, at full 
capacity the dam would run out of water before the next rainy 
season.  GoE officials report that after the 2010 rainy season, the 
dam's reservoir should have sufficient levels to run at full 
capacity.  End Comment. 
MEECE