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Cablegate: Government Food Subsidies Ineffective

VZCZCXRO9334
RR RUEHROV
DE RUEHDS #2645/01 2671159
ZNR UUUUU ZZH
R 231159Z SEP 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 2140
INFO RUCNIAD/IGAD COLLECTIVE
RUEPADJ/CJTF HOA
RUEAIIA/CIA WASHINGTON DC
RUEKDIA/DIA WASHINGTON DC
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RUEWMFD/HQ USAFRICOM STUTTGART GE
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0125
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 ADDIS ABABA 002645

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON EAGR ETRD PGOV ET
SUBJECT: GOVERNMENT FOOD SUBSIDIES INEFFECTIVE

REF: A) ADDIS 2262
B) ADDIS 2569

ADDIS ABAB 00002645 001.2 OF 002


SUMMARY
-------

1. (U) Since 2005, the Ethiopian Grain Trade Enterprise (EGTE) has
provided over 500,000 metric tons of subsidized grain to the
country's urban centers. While the initiative is nominally intended
to cushion the landless urban poor from the mounting food inflation,
urban food prices still remain well above import parity prices. By
diverting over 200,000 MT of food from the Emergency Food Security
Reserve Agency (EFSRA) over the past two years (Ref A) and importing
300,000 MT of grain since July 2008, the EGTE effort has succeeded
in diverting contingency food away from drought affected populations
and removing critically needed foreign exchange from an already
hurting economy (Ref B). By providing most of the subsidized grain
to grain traders, bakeries, and pasta factories and not monitoring
their re-sale prices, the EGTE effectively has subsidized a portion
of Ethiopia's business class and middlemen without notably impacting
the urban poor. As EGTE expects to purchase several hundred
thousand tons of food in December when the likely-poor domestic
harvest reaches the market, it will likely succeed in driving up
prices and taking away supply of grains setting the stage for dire
times in the mid-2009 hungry season. End Summary.

THE AGRICULTURAL MARKETING BOARD LIVES
--------------------------------------

2. (U) In an August 26 meeting with Pol/Econ Chief, EGTE General
Manager Berhane Hailu said that the EGTE is the current name of the
60 year old Grain Board (as it was known under the emperor's time)
and Agricultural Marketing Corporation (as it was known under the
Derg). Despite the name changes, its mandate remains intact: to
create markets for Ethiopian farmers, to stock and redistribute
grain from surplus to deficit areas and to create export markets for
agricultural outputs. While EGTE no longer requires farmers to sell
their output to it, it does continue to purchase grain throughout
the country. Although most such purchases are at the prevailing
price, Berhane confirmed that EGTE does purchase grains at Ethiopian
Government (GoE) set prices if it determines that the prevailing
price is less than the cost of production.

FEEDING THE URBAN POOR
----------------------

3. (U) According to Berhane, in late 2005, the GoE sought to
increase the supply of grain to the Addis Ababa market to counteract
the then-emergent domestic grain price inflation. Berhane argued
that urban centers lacked adequate grain supplies due to increased
demand by factories and bakeries, farmers shifting production to
other crops (such as oil seeds), and farmers holding on to their
produce until prices rise rather than selling immediately upon
harvesting. According to Berhane, EGTE's initial infusion of 53,000
MT, sold at a subsidized price to grain processors, produced an
"inadequate effect" by April 2006. As such, EGTE continued to
supply an additional 165,000 MT from EFSRA stocks over the course of
the next two years. In May and August 2008, EGTE decided to import
two tranches of 150,000 MT of wheat each to sustain this effort.

4. (U) Although the GoE asserted that its objective was to mitigate
the inflationary pressure on the landless urban poor, Berhane
reported that the majority of this wheat is being sold at 350 Birr
per quintal (roughly $360 per ton) to grain traders, bakeries, and
pasta factories for onward sale to the urban public. The remainder
is being sold to consumer associations and individual households
identified by local (kebele) administration representatives by 77
retail sites in the capital and an additional 55 sites in other
urban centers. Berhane noted that despite a 550 Birr per quintal
import (c.i.f.) price, the GoE had established the 350 Birr per
quintal local sale price because "that is the farm gate price of
wheat in Europe and the government believes that it is a good
price." Despite extensive reports of prevailing wheat prices in
Addis Ababa remaining over 750 Birr per quintal, even from EGTE
sales points, Berhane was emphatic that special high quality hard
wheat was selling at most at 650 Birr per quintal with the
EGTE-provided wheat selling at a much lower 450 Birr per quintal.
Berhane confirmed that EGTE does not monitor the prices at which
grain traders, bakeries, or factories sell their products made from
the subsidized wheat.

REPAYING THE FOOD SECURITY RESERVE

ADDIS ABAB 00002645 002.2 OF 002


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

5. (U) Pol/Econ Chief pressed Berhane on when EGTE would repay the
over 200,000 MT it still owes the EFSRA. Berhane argued that EGTE
would buy up grains in November and December when the meher season
harvest reaches the market, or from the already ordered foreign
purchase if domestic prices stabilize before the grain arrives, but
noted that the GoE will then decide whether actually to repay the
EFSRA or to put the purchased grains back into an urban or food
production deficit market in country. Despite Berhane's own
argument that farmers are holding onto grain rather than selling
immediately upon harvesting -- and hence restricting supply in the
market and driving up prices -- he was emphatic that EGTE's huge
additional demand for grains would not drive up domestic prices.

COMMENT
-------

6. (SBU) The EGTE exemplifies the GoE's continued commitment to
intervene in even the most fundamental of markets. Its
ineffectiveness, however, also highlights why so many other
governments have handed over the setting of prices and direct sales
to the private sector. The EGTE's urban grain market interventions
have not alleviated the inflationary pressure on the poor, but
subsidized the profits of grain traders, bakeries, and factories.
Still, rather than acknowledge the fault, the GoE appears to have
reached the conclusion that EGTE's response has to be redoubled. As
the country moves toward elections in 2010, pressure on the GoE to
buffer the politically-restive, pro-opposition urbanites from the
172 percent grain price inflation will likely continue. If the GoE
does continue the urban food subsidization program, its minimal hard
currency reserves will force additional food to be locally sourced.
By taking a significant portion of available food from local
supplies, the GoE risks dampening the grain price reducing effects
of the already diminished expected harvest and potentially
restricting supplies available to sustain vulnerable populations
through the mid-2009 hungry season. Post will continue to engage
GoE officials to liberalize its policies toward trade, foreign
exchange, and domestic market interventions to reign in statist
tendencies. End Comment.

YAMAMOTO

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