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Cablegate: Ethiopia Claims Minimal Impact of Global Financial

VZCZCXRO7041
OO RUEHROV
DE RUEHDS #3467/01 3651316
ZNR UUUUU ZZH
O 301316Z DEC 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3260
INFO RUCNIAD/IGAD COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEWMFD/HQ USAFRICOM STUTTGART GE PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEPADJ/CJTF HOA PRIORITY
RUEKDIA/DIA WASHINGTON DC PRIORITY
RUEKJCS/JOINT STAFF WASHINGTON DC PRIORITY
RHEHAAA/NSC WASHDC PRIORITY
RUEKJCS/SECDEF WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 02 ADDIS ABABA 003467

SIPDIS

E.O. 12958: N/A
TAGS: EAID ECON EFIN ET
SUBJECT: ETHIOPIA CLAIMS MINIMAL IMPACT OF GLOBAL FINANCIAL
CRISIS

REF: A. STATE 134905
B. ADDIS 3462
C. ADDIS 1850

1. (U) In statements to Parliament on October 16 and December
11, Prime Minister Meles has argued that the Ethiopian
economy will be largely unaffected by the global financial
crisis. Noting with pride that Ethiopia's financial system
is insulated from global finance -- with foreign financial
services firms barred from entering the Ethiopian market,
limiting links to correspondent banking relationships --
Meles argued that the crisis will have no direct effect on
the country's financial sector. Still, as the country is
facing its own economic downturn driven by poor macroeconomic
fundamentals, the global crisis Ethiopia is likely to impact
-- but not drive -- a downturn this year.

2. (U) Indirect impacts of the global financial crisis on
Ethiopia are likely to be mixed. As Ethiopia receives
roughly 40 percent of its budget from foreign transfers from
international financial institutions and donors -- neither of
which is likely to reduce significantly in the immediate term
-- the effects on government expenditures are likely to be
minimal. The reduction in demand, both domestic and
international, however, will likely reduce government
revenues. The crisis will also likely spur a reduction in
foreign direct investment (FDI) across the board. This will
be caused both by the loss of net wealth among potential
investors prompting the cancellation or delay of investments,
as well as by Ethiopian Government (GoE) responses which turn
investors away -- such as increasing the role of the state in
the economy and the difficulties presented in doing business
by the closed financial system domestically. The most
pronounced impact on Ethiopia is expected to be in the loss
of remittances flowing into the country. With remittances
normally accounting for US$ 2 billion, or 10 percent of GDP,
the loss of remittances, which has already been reported
anecdotally, will have a potentially large dampening effect
on growth.

3. (U) We assess that the impact of the crisis on trade will
also be mixed. While global demand may negatively affect
Ethiopia's exports, most of these are basic primary products
facing highly price inelastic demand dynamics. As the
Ethiopian Birr is roughly 40 percent overvalued already, yet
exports are growing, we do not believe that the reduced
global demand for Ethiopian exports will be adequate to cause
exports to fall significantly. The IMF shares this view.
The downfall in global demand has had, and will likely
continue to have, a positive impact on world prices of
Ethiopia's imports which we believe will reduce the import
bill and trade deficit without reducing significantly the
actual volume of imports. Importers will continue to face
delays in obtaining letters of credit, but this dynamic stems
more from the structural deficiencies and artificially
overvalued exchange rate than from the global crisis.

4. (U) As Ethiopia is a major recipient of donors'
development and humanitarian assistance, we do not expect to
see an appreciable downturn in donor support. The IMF is
finalizing a minimal US$50 million "Exogenous Shocks
Facility" for Ethiopia and the World Bank has engaged the GoE
on accelerating assistance in response to the country's
domestic macroeconomic crisis as well as the global crisis.
The IMF has gone further in actually urging donors to provide
expeditiously the over US$ 750 million in pledged assistance
for Ethiopia this fiscal year. Resolving the crisis for
Ethiopia, however, requires not just additional aid, but
structural reforms of the highly-statist economy which may
not be easily forthcoming.

5. (U) In conclusion, Ethiopia is likely to be affected more
by its own economic crisis stemming from ideologically-based
economic policies than by the global crisis. Bilateral and
multilateral assistance needs are likely to remain massive.
As reported in Refs B and C, however, simply providing
additional assistance to Ethiopia will only delay the
macroeconomic and governance reforms needed. Instead, for
both bilateral and multilateral assistance to achieve their
development objectives, we recommend:

a) An increased and unified "full court press" of dialogue
bilaterally and through coordination among other major donors

ADDIS ABAB 00003467 002 OF 002


and the international financial institutions to hold the GoE
accountable for ensuring an enabling environment for donor
partner assistance and facilitating assistance programs;

b) A substantial increase in assistance for agricultural
development targeting the most vulnerable, conflict-prone,
and food aid dependent areas;

c) Introduction of formal agreements for all assistance
programs which explicitly lay out benchmarks of progress and
reform agreed to by the GoE; and

d) Maintenance of current levels of assistance to implement
health and education reforms, especially girls' education and
family planning, as well as for democracy and governance
programs.
YAMAMOTO

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