VZCZCXRO9529
OO RUEHROV
DE RUEHDS #1943/01 1990813
ZNR UUUUU ZZH
O 170813Z JUL 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1326
INFO RUCNIAD/IGAD COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP
RUEAIIA/CIA WASHINGTON DC
RHMFISS/CJTF HOA
RUEWMFD/HQ USAFRICOM STUTTGART GE
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RUEKJCS/JOINT STAFF WASHINGTON DC
RHEHAAA/NSC WASHDC
RUEKJCS/SECDEF WASHINGTON DC
RUEKDIA/DIA WASHINGTON DC
RUEHFSC/USOFFICE FSC CHARLESTON 9737
UNCLAS SECTION 01 OF 02 ADDIS ABABA 001943
SIPDIS
STATE FOR AF/EX, OP/OE, ALLOWANCES OFFICE
E.O. 12958: N/A
TAGS: ALOW ECON PGOV ET
SUBJECT: INFLATION PEAKS, THE PUBLIC FEELS THE PINCH
ADDIS ABAB 00001943 001.2 OF 002
1. In June, Ethiopia's general inflation rate hit 55.3
percent on an annualized basis (from June 2007 to June 2008).
Food inflation ticked in at 78.2 percent and cereal
inflation, as a subset of food inflation, soared 132.5
percent over the same period. Cereals include staple grains
such as teff, wheat, barley, sorghum and corn. Factors
contributing to the sharp increase in prices include the
failure of the Belg rains in many regions earlier this year,
effectively destroying the short rains harvests that comprise
15 to 20 percent of Ethiopia's annual agricultural output,
sharp increases in fuel prices, market inefficiencies,
uncurbed government spending, and expansionary monetary
policy.
2. The sharp rise in inflation is unprecedented since the
reign of the communist Derg regime. For the past seventeen
years, Ethiopia has had one of the lowest inflation rates
among sub-Saharan African countries. In general, inflation
has been confined to single-digits during that time.
However, as a predominantly agrarian economy, Ethiopia has
had periodic spikes in inflation due to the failure of
rain-fed harvests as cyclical droughts have from time to time
depressed agricultural output. Conversely, recent bumper
harvests have reduced inflation. Prior to February, 2008,
Ethiopia's highest inflation rate was 21 percent, recorded in
1990/1991 during the aberration of the instability caused by
the transfer of power from the Derg regime to the current
ruling Ethiopian People's Revolutionary Democratic Front
(EPRDF). However, over the past three years inflation has
risen steadily despite good rains (until this year) and
double digit economic growth, finally surpassing the previous
historical high with a rate of 22.9 percent in February of
this year.
3. The stability implications of current inflationary
pressures are unclear at present. A local journalist told us
that Ethiopians are used to lean times and adjust there
lifestyles accordingly. However, other anecdotal evidence
suggests that both urban and rural residents are feeling the
pinch. The Embassy has received a report of unprecedented
looting of food stocks, led by students and civil servants,
in Western Oromiya, near Jima. In Addis Ababa, the Embassy
has noticed an up-tick of thefts targeting expatriates and
middle-class Ethiopians in recent months, including an
unsuccessful (non-AmCit) home invasion last week. One
foreign service national noted that in his Addis Ababa
neighborhood, elderly women ordinarily confined to the home
have been spotted begging in the evenings in neighboring
locales to obtain food to feed their families. To mitigate
the adverse impact of the broader drought-related food crisis
on ordinary Ethiopians, the United States, as Ethiopia's
leading donor, will provide USD 460 million in food
assistance (500,000 metric tons), constituting more than 80
percent of food donations to Ethiopia this year.
4. Comment: While heavy rains in certain areas of the country
over the past month may eventually ease price pressures for
staple grains, the next harvest will not come until December.
As a result, inflation for food and cereals is expected to
continue to rise through year's end. The pending 25 percent
increase in port fees from Djibouti in mid-August will only
fuel inflation. The Ethiopian government has responded by
importing 1.5 million quintals of wheat in an effort to
stabilize prices. Delivery is expected in August. However,
Ethiopia's inflationary pressures are generally not tied to
rises in world commodity prices, as key Ethiopian grains,
such as teff, are not generally traded in world markets.
Rather, the inflationary pressures reflect inefficiencies in
Ethiopia's internal market mechanisms and the failure of
rains earlier in the year. Even with a bumper harvest in
December, food prices may not decline significantly in real
terms given the other pressures in the economy. Economic
conditions for ordinary Ethiopians, including our locally
engaged staff colleagues, will likely get much worse before
any relief. The recently zeroed out Post allowance should
now be raised in response to this inflation and Post will
look to work with Washington on ways to mitigate the effects
of this inflation on local staff salaries. At a minimum, an
off-cycle raise based on foreign currency gains over the past
ADDIS ABAB 00001943 002.2 OF 002
fiscal year (the birr continues to decline against the
dollar, approximately seven percent over the past nine
months) would help. End Comment.
YAMAMOTO