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Cablegate: Monthly Economic Review for December 2007

VZCZCXRO7776
RR RUEHROV
DE RUEHDS #0165/01 0221313
ZNR UUUUU ZZH
R 221313Z JAN 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 9251
INFO RUCNIAD/IGAD COLLECTIVE

UNCLAS SECTION 01 OF 02 ADDIS ABABA 000165

SIPDIS

SIPDIS

DEPARTMENT FOR EEB AND AF/E

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

1. SUMMARY
-- Ethiopian Government's (GoE) 2006/07 macroeconomic performance
report indicates economic growth was broad based and sustainable.

-- GoE projects double digit economic growth in 2007/08, the fifth
year in a row;

-- The Central Statistical Agency (CSA) changed the base year of the
monthly Consumer Price Index (CPI) as well as food and non-food
price weights. Annualized general inflation, according to the new
formula, reached 18 percent and food inflation 21.7 percent in
November 2007.

-- Monetary authorities allowed significant depreciation in the
exchange rate of the Ethiopian Birr in December.

-- World Bank approves a USD 215 million grant to continue the
protecting basic services program.

-- GoE and India signed a USD 640 million loan agreement to support
two Ethiopian sugar factories.

MACROECONOMIC DEVELOPMENTS DURING 2006/07
-----------------------------------------

2. According to the GoE's macroeconomic development report for
2006/07 released in November, overall economic performance was
"broad based and sustainable." Real GDP growth was reported to be
11.4% during 2006/07 and the average growth rate for the last four
years was 11.8%. According to the report, improved infrastructure,
supply of agricultural inputs, rural development, poverty reduction
efforts and good weather conditions have contributed to the growth.
Despite such significant growth figures, annualized general
inflation soared to 17.8% in contrast to 12.3% a year earlier. The
overall fiscal deficit was 3.5% of GDP, largely financed from
domestic borrowing. Domestic liquidity measured by broad money
supply increased by 19.7% mainly owing to expansion in domestic
credit while nominal GDP grew by 29.8%. In the external sector,
trade deficits widened by 9.7% compared to the preceding year but
the overall balance of payments position indicated a build up in
reserves of USD 85.2 million. This came largely due to better
inflows of transfers and net services. The report also indicated
that a total of USD 343 million in external loans were disbursed
during the year. 6,472 projects with investment capital of over USD
10 billion were approved during the year.

ECONOMIC GROWTH
---------------

3. The Ministry of Finance and Economic Development (MoFED) has
revised the national accounts statistics frequently in recent years.
According to the recent revision released in November 2007, real
GDP registered double digit growth rates of 11.7%, 12.6%, 11.6%, and
11.4% in fiscal years 2003/04 through 2006/07 respectively. It
also projected that real GDP will grow by 10.8% in 2007/08. The
share of agriculture is steadily declining from 47.4% in 2004/05 to
44.9% in 2007/08 while the service sector increased from 39.7% to
42.3% in the same period.

4. The Economist Intelligence Unit (EIU) in its annual publication,
"The World in 2008," puts GDP growth for Ethiopia for 2008 at 8%,
still an impressive number. EIU reports "the government claims that
the economy has been growing at an impressive 10% a year since
2003/04, but the real figure is probably more like 5-6%, which is
little more than the average for sub-Saharan Africa." The
International Monetary Fund (IMF) estimated GDP growth of 9.4% for
2006/07 and projected 8.5% for 2007/08.

PRICE DEVELOPMENTS--INFLATION STILL ON THE RISE
--------------------------------------------- --

5. Based on a recently published Household Income, Consumption, and
Expenditure Survey conducted in 2004/05, the CSA changed the base
year for computing monthly CPI from December 2000 through December
2006. The weights of food and non-food items were also adjusted,
with the food price weight dropping from 60.08% to 57.01% while that
of non-food increased from 39.92% to 42.99%. Though the new base
year and adjustments in weights show a slower inflation rate,
inflation continues to rise. According to official statistics
published by CSA, the annualized moving average country level
headline inflation reached 18.0% in November 2007 in contrast to
17.9% in October 2007 and 13.0% a year earlier. Food inflation
reached 21.7% in November 2007 compared to 21.0% and 13.9% in the
preceding month and November last year. Nevertheless, given that
the main harvest begins in October, inflation is expected to decline
as of November.
6. Despite a series of measures taken by the government, prices
remain extremely high and above the long-term average across the
country, the UN's Office for the Coordination of Humanitarian
Affairs (OCHA) said recently. Price increases follow general
inflation in the country, which was 18.4% in August 2007, according

ADDIS ABAB 00000165 002 OF 002


to the National Bank of Ethiopia. An OCHA report stated that "The
wholesale prices of mixed teff (steeple cereal), white wheat, and
white maize were 66%, 80% and 97% greater than the five-year average
(2002-2006) in September, respectively."
EXCHANGE RATE DEVELOPMENTS
--------------------------

7. The Ethiopian Birr is pegged to the U.S. Dollar and currently the
official exchange rate is determined by the daily inter-bank foreign
exchange market in which the National Bank of Ethiopia (NBE),
Ethiopia's central bank, intervenes to regulate the market. The
inter-bank rate typically follows a crawling pattern of daily
depreciation by Birr 0.0001. IN the face of a growing spread
between the official and parallel rates, the authorities allowed a
significant depreciation in December 2007. The inter-bank rate at
the end of December reached Birr 9.2008 per USD in contrast to Birr
9.0444 at the end of November and Birr 8.7759 a year earlier. The
Birr also significantly depreciated in the parallel market, reaching
Birr 9.65 per USD in December versus Birr 8.91 a year earlier. 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 in the world market.

EXTERNAL ASSISTANCE
-------------------

8. The World Bank's Board of Executive Directors recently approved a
USD 215 million International Development Association (IDA) grant to
Ethiopia to extend the Protecting Basic Services (PBS) program which
delivers block grants to sub-national governments and aims to
increase transparency and local accountability in service delivery.
The Bank said current financing supplements the USD 215 million
already committed over the past 18 months of implementation of the
Program, bringing the total IDA financing of the PBS project to USD
430 million.

9. The PBS project is supported by a broad coalition of development
partners including the African Development Bank (AfDB), Canadian
International Development Agency (CIDA), Britain's Department for
International Development (DFID), the European Commission (EC),
Irish Aid, Germany's KfW, the Netherlands, and the World Bank. The
development partners have contributed over USD 800 million thus far
via the original PBS, with additional financing of approximately USD
375 million expected of which the World Bank is providing USD 215
million. The Government and the international community have agreed
that these additional funds will be utilized for the next year,
during which time preparations will be launched to develop a
successor to the PBS in support of decentralized service delivery
for the medium-term.

10. The World Bank's Board of Executive Directors also approved an
International Development Association (IDA) credit of USD 41.05
million to the Government of Ethiopia to help the country finance
its portion of a new transmission line connecting Ethiopia's power
grids to Sudan's. The Ethiopia-Sudan Inter-connector will allow
power trading between the two countries thereby promoting Ethiopia's
power export revenue generation capacity. The project will also
enable Sudan to replace domestic thermal generation with surplus
hydropower from Ethiopia, reducing Sudan's greenhouse gas emissions.
This project is the first power connection within the framework of
the Nile Basin Initiative and is an important step in contributing
to cross-border trade and regional interconnection as part of a
growing power trade agenda in the region.

11. Ethiopia and India signed a loan agreement for $640 million to
support Ethiopia's two sugar factories, Tendaho and Fincha. India's
ExIm Bank will finance the $640 million. "It is the largest ever
line of credit that India has provided to any country so far,"
Gurjit Singh, the country's ambassador to Ethiopia, said while
signing the agreement. Girma Birru, Minster of Trade and Industry
said with the completion of Tendaho sugar factory and enhancing
capacities of the existing four sugar factories, Ethiopia's annual
production of sugar will grow to 1.3 million tones from the current
level of 300,000 tones.

Yamamoto

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