Cablegate: Undercutting Foreign Assistance: Further Restricting Ngos

DE RUEHDS #1672/01 1710508
P 190508Z JUN 08




E.O. 12958: N/A

REF: A) ADDIS 1223;
B) ADDIS 1593;
C) U.S.-Ethiopia Agreement on Economic Cooperation of November 15,


1. (SBU) A series of recent Ethiopian Government (GoE)
administrative requirements risk severely undercutting our foreign
assistance operations. The now inevitable civil society
organizations (CSO) law (Refs A and B) will likely force the end of
all of our, and other donors', democracy and governance, conflict
resolution, and small projects assistance programs. The recent GoE
refusal to register additional USAID implementing partners in
country effectively undermines new projects' ability to operate in
country. A new GoE regulation stripping the U.S. Mission's and our
implementing partners' VAT exemption in favor of a new VAT
reimbursement scheme that does not yet have an established
bureaucracy or procedures, effectively cuts Post's and our partners'
purchasing power by at least 15 percent (the current VAT level) and
potentially more if goods are subjected to excise taxes. The GoE's
unilateral refusal to honor import duty and other tax exemptions for
implementing partners appears to be in violation of the
U.S.-Ethiopia bilateral Economic Cooperation Agreement signed in
1993 (Ref. C). Other donors' partners report that the GoE has begun
implementing a provision of the still-draft CSO law by refusing to
process NGO expatriate staff's work permits until the NGO has
deposited two million Birr (approximately US$200,000) in a blocked,
Ethiopian bank account. Furthermore, despite the clear on-set of
drought and the spike in patients seeking therapeutic food relief,
only on June 6 did the GoE suspend the 71 percent "luxury goods" tax
on emergency therapeutic foodstuffs such as Plumpy Nut.

2. (SBU) Collectively, these duties, restrictions, taxes, and
regulations have already begun to impose a significant cost increase
on U.S. foreign assistance implementing partners. The passage of
the CSO law will likely force the termination of all U.S. and other
donors' foreign assistance for democracy and governance, human
rights, conflict resolution, and our important advocacy programs,
particularly on behalf of women's rights. It will also likely force
the suspension of Post's Self-Help/DHRF programs. If not
reimbursed, the imposition of these new duties and taxes also will
certainly divert tens of millions of dollars of program funds from
U.S. development and humanitarian efforts to GoE coffers. Even if
implemented, but reimbursements are delayed until after the end of
the fiscal year in which paid, these funds will be lost to Post's
operating budget. Although the revised taxation procedures are
likely driven more by the government and economy's dire financial
conditions, their effects -- when combined with the other
bureaucratic actions -- risk fundamentally undercutting a
significant portion of our foreign assistance efforts in Ethiopia.

3. (SBU) The U.S. Embassy from the Ambassador to the management and
political sections and USAID have coordinated with other donors,
NGOs and organizations on confusion over and the affects of the new
procedures. Post has raised this problem with the Foreign Ministry
and the Ambassador will raise this with the Prime Minister and
Foreign Minister after additional consultations with Ethiopia's
legal advisors to the Prime Minister, as well as with other donors.
If our efforts are not successful, we will coordinate with the
Department on an approach to the GoE on resolving these impediments
to our foreign assistance operations. End Summary.

--------------------------------------------- ---------

4. (U) The Ministry of Finance and Economic Development (MOFED)
informed Post in December 2007 of a desire to renegotiate certain
provisions in the Agreement. In particular, MOFED flagged the
following three provisions which it sought to renegotiate:

a) The exemption from profit tax granted to expatriate
organizations financed by or under contract with the USG to execute
projects in Ethiopia under the Agreement;

b) The exemption from indirect taxes on goods of any kind locally

ADDIS ABAB 00001672 002 OF 004

acquired for programs or projects financed by the USG under the
Agreement, or for the Mission; and

c) The disposition of goods including motor vehicles imported free
of duty for programs and projects financed by the USG under this
Agreement or by the Mission or employees of the USG who are not
Ethiopian nationals or permanent residents, imported for personal
use without payment of duty and taxes.

5. (U) On December 26, 2007, Post's Management Officer advised the
Foreign Ministry that Section 579 of the Foreign Operations, Export
Financing and Related Programs Appropriations Act of 2003 requires
the Secretary of State to withhold from foreign assistance funds
allocated to the taxing central government 200% of the amount of
unreimbursed taxes assessed against commodities purchased with U.S.
foreign assistance. The Foreign Ministry noted that it would
respond to Post should the GoE seek to pursue renegotiation.
Neither MOFED nor the Foreign Ministry again raised the issue of
renegotiation of this Agreement until the GoE began unilaterally
stripping tax and duty exemptions from foreign assistance-funded
implementing partners in May 2008.

6. (U) Article 8(5) of the Agreement specifically exempts expatriate
personnel who are in Ethiopia to perform work in connection with USG
assistance from customs and import duties on personal effects within
six months of their first arrival. Beginning in early May, however,
the GoE began unilaterally imposing import duties on the personal
effects of newly arriving staff-members of implementing partners.
Those who do not pay these duties are presumably being assessed
demurrage fees while their effects remain in customs.

7. (U) Article 8(1) of the Agreement establishes a blanket exemption
on all taxes, duties, or similar fees for any supplies, materials,
equipment or property purchased by the USG or funded organizations
for the purposes of any Agreement-covered program. While USAID
implementing partners have long enjoyed ex ante VAT, duty, and other
tax exemption, Centers for Disease Control and Prevention (CDC)
implementing partners have never received such VAT, duty, or tax
exemptions in Ethiopia despite the fact that the Agreement pertains
to all USG economic, technical, and related assistance.
Furthermore, in early May the GoE also ceased to authorize ex ante
VAT exemptions for official purchases from foreign assistance-funded
implementing partners, instead requiring VAT payments to be
reimbursed through a yet-to-be-determined process for which the GoE
has established neither a bureaucracy nor procedures to accommodate.
AS it is extremely likely that such procedures or bureaucracy will
be in place to affect the reimbursement within the same U.S. fiscal
year as the charge is incurred, those funds will likely be lost to
Post and foreign assistance programs in country.

8. (SBU) UN agencies operating in Ethiopia report being subjected to
similar taxes, duties, and fees despite having a similar agreement
with the GoE. A joint UN task force will meet in coming days to
devise an approach to address this issue with the GoE. The World
Food Program (WFP) reports that despite having its own bilateral
agreement with the GoE which is virtually identical to the U.S.
Agreement, WFP is going ahead and paying the duty on imported
equipment and supplies and VAT on all applicable local purchases and
simply hoping that the GoE will reimburse these taxes at some


9. (SBU) While the imposition of previously-exempt taxes represents
a fiscal assault on foreign assistance and our implementing
partners, newly introduced registration and operational barriers
represent a second front of attack. At the request of Ethiopia's
Supreme Court, USAID funded the American Bar Association (ABA) to
develop judicial capacity. Upon submitting its registration
application materials to the Ethiopian Embassy in Washington for
forwarding on to the Foreign Ministry, ABA was informed on April 21
by Minister Counselor Assefa Delil that the Foreign Ministry would
no longer be registering USAID implementing partners. Instead, ABA
was advised to sign an MOU with the relevant GoE partner entity. On
May 12, the Foreign Ministry's Director for NGO Affairs Ajebe Lagaba
informed ABA's Chief of Party that the Ministry "sees no reason to
register the ABA" as it is "just a USAID consultant." As such,

ADDIS ABAB 00001672 003 OF 004

Ajebe advised ABA that USAID would have to resolve ABA's challenges
in getting a telephone line, internet access, bank accounts, etc.
which otherwise require legal registration to secure.

10. (SBU) On May 2, the Ethiopian Embassy delivered the same message
to Women's Campaign International (WCI) noting that the GoE would
not register WCI as long as it received USAID funding. Further, Mr.
Assefa informed WCI that if it could find other funding, it would
have to transfer at least fifty percent of its budget -- including a
minimum of US$225,000 -- to an Ethiopian bank account, before being
considered for registration. British and French Embassy contacts
report that their implementing partners have been told that the GoE
will not process work permits for their expatriate staff unless and
until each partner similarly deposits US$225,000 in blocked
Ethiopian bank accounts.


11. (U) An AmCit employee of a non-USG funded NGO approached Post on
June 7 to report that the GoE has begun posting notices in local
newspapers advising expatriates that they too are subject to income
taxes. On June 8, the Amharic edition of the Reporter newspaper ran
the following notice: "Income Tax Proclamation 286/94 stipulates
that all employees (Ethiopians and expatriates with no diplomatic
privileges) who work at embassies, consulates, international
organizations and non-governmental organizations must declare their
income (salary as well as benefits) and pay their taxes to the city
administration. Therefore, you are hereby advised to pay your income
tax directly to sub-city where your work place is located; or,
through third parties like banks, post offices and commercial
nominees." While no implementing partners have yet informed Post
that their staff has been subjected to income tax, and Article 8(3)
of the Agreement grants an exemption thereto, the publicized notices
may represent a harbinger of GoE actions to come. The provision
also risks exposing expatriate staff members at the International
Community School to a significant tax burden which could prove a
significant disincentive to join the faculty in Addis Ababa.


12. (SBU) In perhaps the most egregious case of extracting fiscal
benefit out of the contributions of others, the GoE has maintained
an exorbitant 71 percent tax on emergency supplementary foodstuffs,
including Plumpy Nut, which it taxes as a luxury item. Despite the
onset of drought, the steadily increasing evidence of famine-like
conditions in parts of Ethiopia, and a spike in admissions to
therapeutic feeding centers, the GoE only suspended the tax on June


13. (SBU) A/DCM convened an interagency meeting on June 11 to
discuss the various dynamics of new tax/duty provisions on USG
operations and foreign assistance programs. Management Officer met
with the Foreign Ministry's Acting Director General of Legal
Affairs, Minelik Alemu, on June 12 to discuss several of these
issues. Once presented with the provision in the Agreement that
grants duty free importation of personal effects for implementing
partners, Minelik agreed with Post's interpretation and called MFA
Protocol to advise that such effects must again be permitted
duty-free importation. Minelik also noted that the original
Diplomatic Note request from MOFED in December has been "suspended"
with no further action pending. Minelik conceded that the GoE must
have a real VAT reimbursement scheme in place or else suspend the
VAT reimbursement-vice-exemption scheme until such is in place. The
USAID Regional Legal Advisor will visit Post this week to further
explore this issue with the GoE.

14. (SBU) The Ambassador has called an internal meeting with all
Mission components on the impacts of these new provisions on June
24, and will meet with implementing partners soon thereafter to
verify whether these initial discussions with the Foreign Ministry
have resolved these administrative impediments. If these
consultations reveal that 1) a timely and functional tax
reimbursement scheme has not been established, 2) that MOFED is

ADDIS ABAB 00001672 004 OF 004

still not honoring the duty and non-VAT tax exemptions for
implementing partners detailed in our bilateral agreement, and/or 3)
the Foreign Ministry still refuses to register USAID implementing
Ambassador will to raise these issues with the Prime and Foreign
Ministers and request a specific exemption for the United States in
accordance with the existing Agreement and long-standing operational
practice. If Post's efforts are not successful, we will coordinate
with the Department on an approach to the GoE on resolving these
impediments to our foreign assistance operations.


15. (SBU) The combination of the now-inevitable CSO law, the
imposition of bilateral agreement-exempted taxes on foreign
assistance-funded programs and implementers, and the introduction of
bureaucratic impediments to NGO operations will certainly have a
huge impact on our foreign assistance programs in Ethiopia and our
ability to leverage these programs to advance U.S. foreign policy
objectives. While passage of the CSO law will likely force Post to
end at least $3.4 million in key foreign assistance programs over
the coming months, and will likely prompt the termination of our
DHRF and possibly self-help program, the imposition of duties and
taxes has already driven up implementing partner expenses and
dramatically cut their purchasing power to implement programs.
Unaddressed, the combined effect of these actions could easily be
tens of millions of U.S. foreign assistance dollars being redirected
from their intended development and relief activities and diverted
to the GoE. While the positive comments by the Director General for
Legal Affairs at the Foreign Ministry are welcome, they offer little
promise of correcting the issue as MOFED has already unilaterally
imposed these provisions throughout the donor community.

16. (SBU) The ruling party's ideological distrust of civil society,
particularly in the political arena, explains the GoE's commitment
to pushing through the CSO law. Still, actions such as subjecting
WFP and OFDA partners to import duties, 15 percent VAT, and 71
percent tax on Plumpy Nut at a time of peaked drought, dramatic
increases in cases admitted for therapeutic feeding, and when food
prices are at historic highs appear intent to pad the government's
skeletal coffers at the expense of its increasingly skeletal
vulnerable population.

17. (SBU) At the same time, the GoE is confident that donors will
not suspend or cut the over US$2 billion in foreign aid Ethiopia
receives each year, regardless of what actions the GoE takes. Prime
Minister Meles explicitly made that very argument to CSO
representatives in June 4 consultations about the CSO law. With
such as a base assumption and facing increasingly dire economic,
foreign exchange, and budget deficit conditions, extracting a pound
of flesh from the one reliable source of national income may be a
rational decision from the GoE's perspective. End Comment.


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