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OO RUEHROV
DE RUEHDS #0910/01 0931421
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O 021421Z APR 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0139
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UNCLAS SECTION 01 OF 03 ADDIS ABABA 000910
SIPDIS
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: ECON EFIN PGOV EAGR ET
SUBJECT: ETHIOPIA: TIGHTER GOVERNMENT OVERSIGHT OF THE
ECONOMY
ADDIS ABAB 00000910 001.2 OF 003
SUMMARY
-------
1. (SBU) In his March 18 performance report of the government
to the House of People's Representatives, Prime Minister
Meles Zenawi avoided commenting on political, security, or
foreign policy dynamics focusing his comments instead on the
state of the economy. Meles' main points were that the
Ethiopian economy is essentially healthy, but sustained high
inflation is "public enemy number one," so the Ethiopian
government (GoE) is playing an increasingly active role to
respond. Meles' argued that to respond to the causes of
Ethiopian inflation -- namely high world prices, excess
liquidity in the economy, and backward and cumbersome
agricultural marketing systems -- the GoE will: 1) continue
and expand subsidies on food and fuel, 2) take appropriate
fiscal and monetary policy "measures," 3) encourage the
people to form "consumer associations" to which the GoE will
ensure distribution of goods at "reasonable prices" through
state enterprises, and 4) create a Task Force, composed of
the federal police, trade ministry, and intelligence service
to "permanently monitor illicit (business) activity" which
will rely broadly on public "tip-offs." While the GoE's
attention to mounting inflation is certainly needed, policy
prescription focused overwhelmingly on unsustainable
government interventions in the economy are neither fiscally
sustainable or consistent with the slow transformation of GoE
public statements in recent years that have shed Marxist
ideology in favor of a model of a developmental state that
supports a market-oriented economy. End Summary.
IT'S PARTLY ABOUT WORLD INFLATION...
------------------------------------
2. (U) Prime Minister Meles began his presentation to
Parliament by noting that the GoE had set two economic goals
for the current fiscal year: maintaining an economic growth
rate of at least 10 percent and increasing exports by at
least 25 percent. Meles reported that, to date, the
Ethiopian economy is on track to register 10.8 percent
economic growth this year with a 32 percent increase in
exports over the past eight months. Despite these
achievements, the GoE has not been able yet to advance toward
two additional goals: stabilizing the price of commodities
and controlling inflation. The Prime Minister argued that
there are three major dynamics contributing to the
approximately 20 percent persistent inflation that Ethiopia
has seen over the past two years. First, world prices,
particularly for steel, cement, grains, and fuel, are at
historic levels. Meles attributed this to increased demand
from China and India, the practice of pricing world oil
prices in U.S. dollars, and the habit of "exploitative
businessmen" hoarding supply stocks during periods of price
peaks. In response to this challenge, Meles detailed GoE
efforts to shift toward domestic production, where possible,
to replace imported items such as crops and cement. Noting
that these steps would only yield longer term results, the
Prime Minister highlighted that the GoE has spent over 4.2
billion Birr (roughly $500 million) in recent months to
subsidize fuel and wheat prices, and has eliminated the
import duty on cement, as short term solutions. In light of
the persistent inflationary pressures, Meles stated that the
GoE had no option but to continue, and expand, the policy of
subsidization. In particular, the GoE will continue to
provide subsidized wheat and edible oil to low income urban
dwellers. Rather than expose the public to the shock of
world oil prices, Meles affirmed that the GoE will continue
the policy of step-by-step alignment of local and world fuel
prices. As a new initiative, the GoE will also now lift the
Value Added Tax and Turn Over Tax on grains.
...EXACERBATED BY DOMESTIC DYNAMICS
-----------------------------------
3. (U) Meles also noted that the increase in the amount of
money in circulation in Ethiopia is also a significant
contributing factor fueling inflation. Meles
matter-of-factly acknowledged that negative real interest
ADDIS ABAB 00000910 002.2 OF 003
rates (currently roughly negative 14 percent) are
contributing to excess liquidity in the economy, but at the
same time argued that the broad profitability of Ethiopian
businesses means that borrowers are repaying their loans and
driving up deposits held by banks. He noted that despite a
central bank regulation in summer 2007 requiring banks to
double their reserve requirements from 5 percent to 10
percent, this intervention had not been fully successful in
mopping up excess liquidity. Appearing to pre-emptively
deflect criticism, Meles flagged that GoE borrowing to cover
the budget deficit has been maintained at a level of only 2.7
percent. He did not, however, specifically address questions
as to what had caused the excess currency in circulation.
Without providing specific details, the Prime Minister
confirmed that the Finance Ministry would "take measures" to
strengthen National Bank of Ethiopia (NBE, Ethiopia's central
bank) efforts to restrict the growth of money supply.
4. (SBU) Meles also acknowledged the "backward and
cumbersome" agricultural marketing system as one of the main
causes of inflation. Again, without discussing the specific
challenges of the system in place or how it would be
rectified, Meles made passing reference to the expected
opening this year of the long delayed commodities exchange
before moving on to detail one of the speech's main
initiatives -- consumer associations. Again without detail,
Meles asserted that the GoE will now urge the public to
organize themselves into "consumer associations" to enable
them to buy basic goods at reasonable prices. Meles said
that the associations would hold elections to provide for
control by the members. The GoE's role would be limited to
"ensuring the distribution of goods to the associations at
reasonable prices through state enterprises." The Prime
Minister did not clarify whether existing state enterprises
would be sufficient to fill this role or if new parastatals
would be required.
5. (SBU) Meles next moved on to highlight the role of illicit
businessmen who seek to enrich themselves illegally through
exploiting market opportunities. While he refrained from
invoking his oft-used label of "rent seekers," he was quick
to chastise those who try to benefit inappropriately from the
prevailing situation. Meles noted that the GoE had long
recognized the challenges and costs of pursuing all cases of
market exploitation and, as such, had pursued a policy of
cracking down on the egregious offenders in an effort to set
an example adequate to induce others to refrain from illegal
operations. This approach, Meles lamented, had clearly
failed. In response, the GoE is establishing a Task Force,
composed of the Ministry of Trade and Industry, the Federal
Police, and the National Security and Intelligence Service to
"permanently monitor illicit activities" and prosecute all
serious offenders. Similar structures would be introduced in
the regional states and major cities as well. The Task
Force, Meles emphasized, would depend heavily on the public
to provide "tip-offs" about offenders.
COMMENT
-------
6. (SBU) Despite having initially been founded as the
Marxist-Leninist League of Tigray, and espousing
heavily-statist economic policies, the ruling Ethiopian
People's Revolutionary Democratic Front (EPRDF) increasingly
has adopted public references to market-oriented economic
reforms in recent years. Nevertheless, the policy response
that the Prime Minister presented to tackle the persistent
challenge of high inflation suggests that the GoE continues
to be led more by vestiges of this ideological orientation in
addressing economic challenges than by creating a conducive
environment for competition to improve market efficiencies.
While Meles often invoked fuzzy economics around the details,
his broader arguments pertaining to the causes of high
Ethiopian inflation were generally sound. Still, his
suggestion that conventional western economic thought is
flawed -- as evidenced by the observed increase in bank
deposits despite negative real interest rates -- highlights a
common sentiment held among ruling party hardliners and helps
ADDIS ABAB 00000910 003.2 OF 003
explain the government's continued reliance on a strong
government role in the economy. The Prime Minister made no
mention of increasing interest rates to mop up excess
liquidity or of steps that could rid markets, particularly
agricultural, of inefficiencies caused by the very state
enterprises trumpeted or bureaucratic regulations imposing
trade through middlemen and government approved traders. It
is encouraging that the GoE is finally addressing problems
within Ethiopia's macroeconomic fundamentals, but overbearing
oversight and micromanagement of the economy present more
causes for concern than hope for a resolution. End Comment.
YAMAMOTO