Cablegate: Ethiopia Monthly Economic Review for August 2007

DE RUEHDS #2860/01 2621218
R 191218Z SEP 07




E.O. 12958: N/A

--Council of ministers approved salary increase for civil servants;

--The consumer price index still on the rise; CPI inflation reached
18% in August; Government action to curb price hike; minister asks
to expose speculators;

--The official exchange rate of the Ethiopian Birr against the US$
continued to slowly depreciate; Birr 9.0359/US$ at the end of

--Ethiopia received $2.6 billion loans and aid from external sources
during the 2006/07 Ethiopian fiscal year, which ended July 7, 2007;

--Investment in the mining and energy sector is flourishing; 14
foreign firms are granted license;

--Ethiopian Airlines secured a loan for the purchase of 10 B787
Dreamliner aircrafts. End Summary


2. Finance Minister Sufian Ahmed announced on September 1 that the
Ethiopian Government (GoE) approved a significant salary increase
for civil servants effective July 8, 2007. According to the Minster,
the decision stemmed from a study conducted over the last few months
by a task force composed of experts from his ministry and the Civil
Service Commission on how to abate the effects of rising inflation
on civil servants. Although the decision will cost the GoE an
estimated $200 million per annum, the Minister argued that the
increment would not have significant fiscal impact as the FY 2007/08
budget was prepared with a salary adjustment in mind. The salary
increment ranges from 17.5 to 36.2 percent based on different wage
grades with employees from high and low salary brackets receiving
the greatest percentage increase. The move increases the minimum
wage by 36.2%, from $26 to $35 per month. The minimum pension is
also increased by 60 percent from $11 to $17.7. In a recent
discussion with Ethiopian youth, Prime Minister Meles also indicated
that similar salary adjustments will be made to state enterprises,
major employers in Ethiopia.

3. Despite increasing pressure from opposition parties, the GoE has
been hesitant to introduce a salary adjustment arguing that the
source of inflation was not fully understood. While local analysts
differ on the likely impact of the increase on inflation, most see
no fiscal impact on the state. Many see it as a nominal wage
increase rather than a real wage improvement that should come as a
result of the continuous structural transformation of the economy.
Some view the current salary adjustment exacerbating the existing
inflation, due to businesses speculating on prices. The Central
Statistics Agency (CSA) announced that the Consumer Price Index
(CPI) as of July stood at 18 percent on an annualized rate in
contrast to 12.3 percent last year. Analysts recommend the
government to pursue its reform agenda in liberalizing and
transforming the structure of the economy in the areas of finance;
telecommunications and expansion of the tax base from the current
coverage of 13 percent of GDP to at least the African average of 29


4. According to official statistics published by CSA, the annualized
average country level headline inflation rate reached 18 percent in
July 2007 in contrast to 17.8 percent in June, 17.3 percent in May
and 12.3 percent a year earlier. In a bid to curb the persistently
rising inflation the government has: begun distributing subsidized
wheat in Addis Ababa since February 2007; lifted the surtax on
imported edible oil; increased monitoring of hoarding by speculative
businesses; banned the export of selected foodstuffs; and raised the
minimum bank deposit rate and commercial banks' reserve requirement
ratio. State Minister of Trade and Industry, Ahmed Tusa, defended
the GoE's efforts in combating inflation, arguing that inflation is
a routine phenomenon in any economy caused by a variety of market
forces and suggesting that much of the price hikes have been caused
by lack of strong consumer groups in Ethiopia.

5. Nonetheless, some economists predict that inflation may continue
to rise until the main harvest begins in October. The recent
increases in salaries coupled with the Millennium celebration have
already triggered increases in the prices of consumer goods.


6. The National Bank of Ethiopia (NBE) claims that the official
exchange rate of the Ethiopian Birr is determined by the daily
inter-bank foreign exchange market in which NBE (central bank)
intervenes to regulate the market. The inter-bank rate at the end
of August reached Birr 9.0359 per US dollar in contrast to Birr
9.0326 at end July 2007 and Birr 8.6998 a year earlier. Meanwhile,
the Birr depreciated in the parallel market to Birr 9.32 from Birr

ADDIS ABAB 00002860 002 OF 003

9.25 last month. The parallel market rate is expected to appreciate
in favor of the Birr in September as more remittances are expected
to flow into Ethiopia for the Ethiopian Millennium celebrations.
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.


7. The central bank liberalized the lending interest rate of banks,
allowing it to be determined by market forces for the first time
since January 1998. The central bank continues to control the floor
bank deposit rate. The minimum deposit rate which was fixed at 3
percent per annum since March 2002 was revised to be 4 percent
effective July 4, 2007. Consequently, commercial banks have revised
their interest rate structure; minimum and maximum lending rates
revised upwards by one percentage point to 8 percent and 15 percent
per annum, respectively. Considering the double digit inflation
rate of 18 percent, real interest rates on treasury bills,
inter-bank money market, bank deposits and lending are significantly
negative, implying depositors are subsidizing borrowers that
encourage monetary expansion and fueling inflation.


8. Ethiopia benefited from a total of US$2.6 billion in foreign
loans and aid during the just concluded Ethiopian budget year.
According to the Ministry of Finance and Economic Development, $1.8
billion of this came in aid while the balance came from loans.
While $2.3 billion loans and aid were obtained from multilateral
sources the remaining $300 million came from development partner
governments. Britain, Sweden, Canada, Ireland, France, Germany,
Japan, China, the Netherlands, the USA and Finland were among the
development partners who extended aid to Ethiopia during the
reported period. Roughly 80 percent of the aid came from Britain,
Sweden, Canada, and France. Most of the external resources are
designated for the implementation of agriculture, electrification,
health, education, road construction, clean water, food security and
disaster prevention, capacity building, and telecommunications
projects. Ethiopia has also benefited from HIPC and the
Multilateral Debt Relief Initiative (MDRI) approved by G8 countries.
Some $200 million debt was cancelled through HIPC and MDRI
initiatives during the year.


9. Investments in the petroleum and mining sectors have flourished
in Ethiopia in recent periods. Some 66 mineral operational and
exploration licenses have been issued by the Ministry of Mines and
Energy. Licenses were granted to 42 private companies engaged in
large-scale mining operations, 14 of which are foreign, 21 are joint
ventures, and seven local. Petroleum exploration is currently
underway in the Gambella and Ogaden regions as well as in the
Southern Rift and Abay Basins. Malaysia's Petronas, Holland's
Pexco, Sweden's Lundin, and China's Zhongyuan Petroleum Exploration
Bureau are among the major foreign companies involved in Ethiopia's
petroleum exploration and development. According to the Ministry,
roughly 40 percent of the country has already been geologically
mapped for mineral exploration and hydrology geophysics.

10. Fuel imports represent a significant drain on Ethiopia's scarce
hard currency reserves. A decade ago, Ethiopia's expenditure on
fuel was a mere $166 million; in fiscal year 2006/07 the country
imported 1.8 million tons of petroleum products valued at $885
million. According to the Ethiopian Petroleum Enterprise (EPE),
Ethiopia's petroleum demand for 2007/08 fiscal year is estimated at
$1.2 billion.
11. The escalating cost of petroleum in the global market has
prompted the GoE to look for alternative energy resources,
especially bio-fuel. The Council of Ministers approved a bio-fuel
development and utilization strategy this year. The strategy
provides for the development and use of bio-fuel extracted from
plants in ways that do not tamper with food security efforts and
that do not contravene the interests of farmers and pastoralists.
The strategy also provides for export of such bio-fuel products.
Alemayehu Tegenu, Minister of Mines and Energy, said that fuel
stations in Addis Ababa will start to sell 95 percent benzene/ five
percent ethanol blended fuel by October 2007, and would increase the
ethanol portion to 10 percent in the future.
12. Since its beginnings in 1946, Ethiopian Airlines (EAL) today
serves 50 destinations across the globe -- 28 of them in Africa -
with annual passenger traffic of over 1.5 million. At present
Ethiopian owns 28 commercial aircraft and has ordered ten Boeing 787
Dreamliner aircrafts -- the first two of which are scheduled for
delivery in October 2008. Kassim Geresu, Executive VP for Finance
and Planning, said that EAL had selected an ING and DVB consortium
to finance the purchase over a proposal by a Citibank, Barclays, and
Natexis consortium's offer. The management of the airline and the
banks are expected to sign an agreement in the near future. The ten

ADDIS ABAB 00002860 003 OF 003

B787 aircraft are valued at $1.3 billion. General Electric will
supply 20 engines which will power the ten B787s. The total value
of the engines is $300 million. The US ExIm Bank had agreed to
provide a bank guarantee for 85 percent of the loan required for the
aircraft purchase.

13. In fiscal year 2006/07 ending June 2007, EAL generated $763
million revenue, a 28 percent increase compared to that of last
year. Its operating expense has increased by 30 percent to $741
million. The airline transported 2.1 million passengers, a 19
percent annual increase. In the current fiscal year (2007/08)
Ethiopian plans to increase its operating revenue by 18.6 percent to
$900 million. The airline is facing stiff competition from foreign
carriers, especially Middle Eastern carriers such as Emirates and


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