Cablegate: Ethiopia: Monthly Economic Review for October 2007

VZCZCXYZ0014
RR RUEHWEB

DE RUEHDS #3368/01 3251210
ZNR UUUUU ZZH
R 211210Z NOV 07
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 8620
INFO RUCNIAD/IGAD COLLECTIVE

UNCLAS ADDIS ABABA 003368

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EINV EAGR ET
SUBJECT: ETHIOPIA: MONTHLY ECONOMIC REVIEW FOR OCTOBER 2007

REF: ADDIS ABABA 2983

1. SUMMARY

-- Joseph Stiglitz cites Ethiopia's impressive economic growth.

-- Consumer Price Index (CPI) continues to rise: General inflation
reached 19.3% and food inflation 29.2% in October.

-- The Birr continues to depreciate: the official exchange rate
continues a slow crawl, but the parallel market rate indicates
significant depreciation.

-- Balance of Trade: Ethiopia secured $1,185.1 million USD from
merchandise exports while the total import bill rose to $5,126.2
million during fiscal year 2006/07. Fuel imports alone took 75
percent of the total export earnings.

-- Telecommunications: Ethiopia will not issue new mobile licenses
to private investors until at least 2010 according to the Minister
of Transport and Communication.

-- Foreign Investment: The Chinese government has embarked upon
increased activities with a view to encouraging Chinese investors to
widely involve in Ethiopia. End SUMMARY

ECONOMIC GROWTH

2. In a lecture to the Ethiopian Economic Association and the
Ethiopian Development Research Institute, Professor Joseph Stiglitz,
a leading economic educator, said that Ethiopia's economy has been
doing well over the last few years. He seemed impressed by
Ethiopia's economic growth, although he was concerned about
sustainability. While most east African and Asian countries have
experienced significant economic growth, Stiglitz was struck by the
source of Ethiopia's growth. He is quoted as saying "Some of the
growth these developing countries registered over the last several
years is a result of hike in commodity prices, particularly in the
case of China. The success in Ethiopia is clearly far more than
that. It has got to do with an increase in production output,
diversification, and going into new areas." He further highlighted
Ethiopia's highly egalitarian distribution of income.

PRICE DEVELOPMENTS--INFLATION STILL ON THE RISE

3. Inflation is on the rise in Ethiopia over the past three years.
According to official statistics published by the Central Statistics
Agency (CSA), the annualized moving average country level headline
inflation rate reached 19.3 percent in September 2007, up from 18.5
percent in August and 12.4 percent a year earlier. Annual general
inflation was 23.3 percent while food inflation rose to 29.2 percent
in September. See Reftel for discussion of possible causes of this
inflation.

EXCHANGE RATE--BIRR CONTINUES DEPRECIATION

4. Ethiopia follows a managed floating exchange rate regime where
the official exchange rate is determined by the daily inter-bank
foreign exchange market in which National Bank of Ethiopia (NBE),
Ethiopia's central bank, intervenes to regulate the market. The
inter-bank rate at the end of October was Birr 9.0414 per USD in
contrast to Birr 9.0383 at end September and Birr 8.7018 a year
earlier. Meanwhile, the Birr is significantly depreciating in the
parallel market, reaching Birr 9.32 per USD in October from Birr
9.26 in September. The depreciation in the local currency is
triggered by the acute problems of foreign exchange in the country.
Driven by rising domestic inflation relative to prices of Ethiopia's
major trading partners, the real effective exchange rate is
appreciating, making the country's exports less competitive.

TRADE DEFICIT GROWS-- MAJORITY OF EXPORT RECEIPTS SPENT ON FUEL

5. During fiscal year 2006/07, Ethiopia's imports totaled 5.1
billion USD and export totaled 1.2 billion USD, indicating a trade
deficit of 3.9 billion USD. The deficit is narrowed by net service
payment of 1.6 billion USD, and private & official remittances of
2.9 billion USD. Major imports include transport and industrial
capital goods (36.5 percent), petroleum products (17.1 pecent), raw
materials such as chemicals, consumer durables and non-durables such
as cereals and textiles (43.5 pecent). China is the largest
supplier (16.6 percent), followed by Saudi Arabia (15.3 percent),
Italy (7.7 percent), India (7.0 percent), and United States (3.8
percent). In the export side coffee (35.8 percent) is still the
leading export followed by oilseeds (15.8 percent), gold (8.2
percent), khat (7.9 percent), leather and leather products (7.6
percent), pulses (5.9 percent) and flowers (5.4 percent). Major
export destinations include Germany (11.8 percent), followed by
Italy (6.3 percent), Saudi Arabia (6.2 percent), Japan (6.1
percent), United States (5.0 percent), China (5.0 percent), and
Netherlands (4.8 percent) and Africa 15.5 percent). The majority of
exports to Africa go to Djibouti.
6. Ethiopia spends more than 75 percent of its hard currency earned
from foreign trade and commercial activities to finance fuel
imports. During fiscal year 2006/07 the country imported close to 2
billion liters of fossil oil and spent 875.1 million USD. Its needs
in terms of volume, however, are comparatively low as Ethiopia stood
as 198th out of 205 countries in per capita oil consumption in 2004,
requiring only 0.379 barrels per 1,000 people.
7. Importation of petroleum products is monopolized by the Ethiopian
Petroleum Enterprise (EPE) and distributed among petroleum companies
such as TOTAL, Shell, National Oil Company (NOC) and Yetebaberut
Beherawi Petroleum (YBP) as well as the new entrant, Kobil.
Distributors earn margins per liter of Birr 0.595 for benzene and
Birr 0.583 for diesel.
TELECOM--NO PRIVATE SECTOR INVOLVEMENT UNTIL AT LEAST 2010
8. Ethiopia has launched a $1.5 billion project with Chinese company
Zhong Xing Telecommunication Equipment Company Limited (ZTE) to lay
down a fiber optic cable network and erect base stations across the
country that will bring 85 percent of the country under mobile phone
coverage. "Our policy at the moment is that we are not looking at a
second operator. Once the basic infrastructure is deployed by 2010,
then we can look at such an issue," Juneydi Sado, Minister of
Transport and Communications, told Reuters. "Because of the
universal access issue, sometimes operators might not be interested
in the remote areas where financially it might not be viable, so we
want to address this issue first and after that we can talk about
this public-private issue." The government project plans to
increase the fiber optic network to 14,000km from the current
4,000km and the government also intends to install 65,000 public
phones throughout the country. The Ethiopian Telecommunication
Company (ETC)has targeted to increase the mobile and fixed-line
subscriber base to over 10 million by 2010 from the current 3.6
million.

FOREIGN INVESTMENT - THE CHINESE CONTINUE TO ENGAGE

9. The Chinese government has embarked on increased activities to
encourage Chinese investors in Ethiopia, the Chinese Ambassador to
Ethiopia told reporters. Several Chinese investors are showing
interest to engage in investment activities in Ethiopia. The
Ambassador is quoted as saying "we consider Ethiopia to be a very
good country for Chinese cooperation; the political situation is
stable and the government is trying to encourage democracy and
people's participation." Currently, Chinese companies are investing
significantly in Ethiopia in the mine, roads, health, and ICT
sectors.

YAMAMOTO

© Scoop Media