Cablegate: Government Diverts World Bank Project Funding To

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UNCLAS SECTION 01 OF 02 ADDIS ABABA 002254

SENSITIVE
SIPDIS

TREASURY FOR U.S. EXECUTIVE DIRECTOR TO WORLD BANK AND
U.S. EXECUTIVE DIRECTOR TO AFRICAN DEVELOPMENT BANK
TREASURY ALSO FOR REBECCA KLEIN
AF/EPS FOR ELLIOT REPKO
EEB/IFD/ODF FOR BROOKE WALKER
USAID FOR COO/PAC KERRI DIZOGLIO

E.O. 12958: N/A
TAGS: EAID EAGR ECON PGOV PREL ET
SUBJECT: GOVERNMENT DIVERTS WORLD BANK PROJECT FUNDING TO
BUDGET SUPPORT

ADDIS ABAB 00002254 001.2 OF 002

SUMMARY
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1. (SBU) The Ethiopian Council of Ministers on August 1
approved the transfer of U.S. $301 million from on-going
World Bank and African Development Bank (AfDB) projects to
provide subsidized fertilizer to the agricultural sector.
The funding -- U.S. $237 million from World Bank projects and
U.S. $64 million from African Development Bank projects --
represents a diversion of 10 percent of the total portfolio
value of both development banks. According to a press
statement issued August 1 from the Office of the Prime
Minister, and confirmed by the World Bank, the purpose of the
diverted funding "is to transfer funds being secured for the
execution of ongoing development projects to the purchase of
agricultural inputs, particularly fertilizer." World
Bank/Ethiopia's Communications Officer Gelila Woodeneh
confirmed that the funds were diverted under the Bank's
Global Food Crisis Response Facility (GFRP) program.
Providing hard currency for a down payment on Ethiopian
Government (GoE) procured fertilizer that will only be
received in summer 2009, this transfer represents de facto
budget support by the World Bank and AfDB to the GoE,
circumventing standard reviews by these institutions' Boards
of Directors to perpetuate the state dominance of, and
control over, the agricultural sector without addressing
Ethiopia's current food shortfall or relief distribution
challenges.

2. (SBU) World Bank Communications Officer Gelila Woodeneh
confirmed to Post on August 13 that funds were diverted from
projects across a variety of sectors including
agriculture/rural development, transport, trade, water
supply, energy, etc. She explained that low performing
projects were canceled to divert some funds, while funds from
projects with slow implementation timelines were diverted
with repayment to reimburse those projects later in the life
of the projects. Additionally, an $85 million "gain" from
exchange rate fluctuations since projects funded through
Special Drawing Rights were approved, was allocated to the
diversion. The World Bank confirmed that the GoE, in
consultation with World Bank/Ethiopia, selected which
projects would experience cuts. They could not confirm if
the decision was reviewed or approved by the Bank's Board of
Executive Directors.

3. (SBU) The World Bank confirmed to Post on August 15, that
funding was not/not diverted from the contentious Protecting
Basic Services (PBS) project established in 2006 to provide
block grants to regional governments as an alternative to
budget support. Nevertheless, World Bank Resident
Representative Kenicha Ohashi told Bloomberg on August 14
"this is like budget support; it is helping the government
with hard currency."

4. (SBU) The GFRP program was intended to provide rapid
assistance to governments to address the immediate term
burdens of high world food prices. While the World Bank
justified the diverted funds to Post by arguing that the
purchase of fertilizer would "boost agricultural production
in the short term," Ms. Woodeneh later confirmed that the
fertilizer purchased with the diverted funds would not reach
Ethiopia until summer 2009. The scheme is not combined with
any form of heightened engagement to develop improved
government policies to address persistent market
inefficiencies.

COMMENT
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5. (SBU) While Ethiopia is in the midst of an acute food
crisis and rising world fuel and fertilizer prices affect
domestic prices, Ethiopia's food price dynamics are

ADDIS ABAB 00002254 002.2 OF 002

overwhelmingly insular and bear little relation to world food
prices. Increases in Ethiopia's agricultural productivity in
recent years, in fact, stem from the expansion of land under
cultivation rather than improvements in yield per acre. The
diversion of development bank funds to purchase fertilizer
will counter world fertilizer price increases to maintain
existing fertilizer supply levels domestically, but
fundamentally does little if anything to remedy the
inefficiencies in Ethiopia's agricultural sector or to
enhance food security. The Bank's endorsement of this move
-- which will have no impact for at least one year -- under
the auspices of an expedited, limited-review mechanism to
address the immediate term impacts of the food crisis, is
concerning. As the GoE continues to renege on its promise to
permit social monitoring safeguards to ensure transparency in
the World Bank's budget support alternative PBS project, the
Bank should now be looking to move further away from budget
support, not closer to it. End Comment.
MALAC

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