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Cablegate: Ethiopia: Imf Article Iv Mission Concerned About

VZCZCXRO6326
RR RUEHROV
DE RUEHDS #0776/01 0741312
ZNR UUUUU ZZH
R 151312Z MAR 07
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 5074
INFO RUCNIAD/IGAD COLLECTIVE
RUEHNR/AMEMBASSY NAIROBI 2892
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0009

UNCLAS SECTION 01 OF 02 ADDIS ABABA 000776

SIPDIS

SENSITIVE
SIPDIS

STATE PASS TO USTR

E.O. 12958: N/A
TAGS: ECON ETRD EINV ET
SUBJECT: ETHIOPIA: IMF ARTICLE IV MISSION CONCERNED ABOUT
SUSTAINING GROWTH, RISING INFLATION

ADDIS ABAB 00000776 001.2 OF 002


1. (SBU) Summary: A February 23 - March 9 International
Monetary Fund (IMF) Article IV consultation mission
concluded that the Ethiopian economy was "fine for now," yet
noted privately to emboffs that it had serious concerns about
Ethiopia's ability to sustain current growth rates. The
mission publicly congratulated the government on the
economy's ability to rebound from the 2002/03 drought with
annual average growth of close to 11 percent. Privately,
however, IMF officials expressed concern about a number of
issues, including rising inflation rates and its negative
impact on the poor, interest rates that discouraged savings,
structural reforms to barriers that threaten sustained
growth, and the GOE's ability to service increasing debt
levels. The mission advised the government to dampen demand
and enhance growth through structural reforms to ensure
macroeconomic stability and sustained growth. Significantly,
the two sides agreed to consult semi-annually instead of
annually. End Summary.

2. (U) IMF Deputy Managing Director Takatoshi Kato led the
February 23 - March 9 mission and met with many senior
government officials, including Prime Minister Meles,
Ministry of Finance and Economic Development Sufian Ahmed,
Economic Advisor to the PM Neway Gebre-ab, and Governor of
the National Bank of Ethiopia Teklewold Atnafu. Senior IMF
resident representative Arnim Schwidrowski briefed pol/econ
chief and econoff March 13.

GROWTH DAMPENING INFLATION
--------------------------

3. (SBU) Schwidrowski told pol/econ chief March 13 the IMF
mission was particularly concerned about rising inflation
rates. He said the GOE appears to acknowledge that large
government public work projects are a significant factor
behind both inflation and balance of payments problems, but
attributed the rise in inflation to farmer hoarding. (Note:
The IMF and USAID do not consider hoarding by farmers as a
major contributor to Ethiopia's rising inflation. End Note.)
Schwidrowski said that the IMF advised the government to
tighten monetary and fiscal policy to dampen demand. He said
only time will tell whether the GOE is willing to dampen
demand to ease inflation.

4. (SBU) In addition to rising inflation, Schwidrowski said
that there are some profound imbalances in the economy,
especially interest rates. He explained that when bank
deposits earn 3 percent while inflation runs at 20 percent,
consumers lose money by leaving it in the bank. With a
maximum bank loan rate of 15 percent -- still five percent
below inflation -- borrowers gain an implicit subsidy of 5
percent, he said. This, Schwidrowski continued, promotes
borrowing for construction projects that can ultimately
supply rent or other cash flow. He added that the boom in
the construction sector reflects this reality.

REFORMS NECESSARY TO SUSTAIN GROWTH
-----------------------------------

5. (SBU) Schwidrowski said that another priority of the
mission was to inform Ethiopia that sustaining current growth
rates will be difficult without structural reforms to
diversify the economy and increase productivity. He added
that a study by the IMF's Addis office suggested that the
Ethiopian economy's growth has reached its limit.
Schwidrowski said that there should be a dialogue with the
GOE and the World Bank about how to remove key bottlenecks
that will eventually constrain growth, such as the GOE's
monopolies in the fertilizer industry and telecom sector and
near monopoly in the financial sector. Schwidrowski added
that the IMF and international donors need to move beyond
"simply clamoring" for change in the telecom and financial
sectors.

FOREIGN EXCHANGE RESERVES AND EXTERNAL DEBT
-------------------------------------------

6. (SBU) Schwidrowski said that the IMF was concerned that
foreign aid and remittances would provide for only two and
half months of import coverage in foreign exchange reserves.
Schwidrowski said that there was no immediate problem for the
GOE because both aid flows and remittances were now rising,
but Ethiopia was vulnerable to shocks such as drought or a
serious disruption of aid flows/remittances. The IMF,
Schwidrowski noted, approved of the GOE's current policy to

ADDIS ABAB 00000776 002.2 OF 002


slowly devalue the Birr and said it was a necessary
adjustment prudently administered.

7. (SBU) Schwidrowski expressed his concern about debt
sustainability and Ethiopia's growing indebtedness to China.
The mission, Schwidrowski explained, was particularly
troubled about the proposed USD 1.5 billion loan from China
for modernization of the telecom sector. The mission urged
the GOE to carefully evaluate what revenue streams such
investments would generate and how much growth would be
impacted before agreeing to the loan. According to
Schwidrowski, the mission warned the GOE that it should avoid
going back into debt for projects that will not pay for
themselves or boost the economy significantly in the long run.

COMMENT
-------

8. (SBU) The IMF mission raised many eyebrows among donors
and press by publicly repeating questionable GOE numbers on
annual economic growth. Likely, the Fund's public support of
Ethiopia's contested growth statistics was a political
decision aimed at deepening the relationship and building
trust. Thus far, the Fund's praise in public, criticize in
private strategy seems to be effective at moving the two
towards greater, though incremental, cooperation.
WILGUS

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