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Viewing cable 07ADDISABABA776, ETHIOPIA: IMF ARTICLE IV MISSION CONCERNED ABOUT

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Reference ID Created Released Classification Origin
07ADDISABABA776 2007-03-15 13:12 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Addis Ababa
VZCZCXRO6326
RR RUEHROV
DE RUEHDS #0776/01 0741312
ZNR UUUUU ZZH
R 151312Z MAR 07
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 5074
INFO RUCNIAD/IGAD COLLECTIVE
RUEHNR/AMEMBASSY NAIROBI 2892
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0009
UNCLAS SECTION 01 OF 02 ADDIS ABABA 000776 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV ET
SUBJECT: ETHIOPIA: IMF ARTICLE IV MISSION CONCERNED ABOUT 
SUSTAINING GROWTH, RISING INFLATION 
 
ADDIS ABAB 00000776  001.2 OF 002 
 
 
1. (SBU) Summary: A February 23 - March 9 International 
Monetary Fund (IMF) Article IV consultation mission 
concluded that the Ethiopian economy was "fine for now," yet 
noted privately to emboffs that it had serious concerns about 
Ethiopia's ability to sustain current growth rates.  The 
mission publicly congratulated the government on the 
economy's ability to rebound from the 2002/03 drought with 
annual average growth of close to 11 percent.  Privately, 
however, IMF officials expressed concern about a number of 
issues, including rising inflation rates and its negative 
impact on the poor, interest rates that discouraged savings, 
structural reforms to barriers that threaten sustained 
growth, and the GOE's ability to service increasing debt 
levels.  The mission advised the government to dampen demand 
and enhance growth through structural reforms to ensure 
macroeconomic stability and sustained growth.  Significantly, 
the two sides agreed to consult semi-annually instead of 
annually.  End Summary. 
 
2.  (U) IMF Deputy Managing Director Takatoshi Kato led the 
February 23 - March 9 mission and met with many senior 
government officials, including Prime Minister Meles, 
Ministry of Finance and Economic Development Sufian Ahmed, 
Economic Advisor to the PM Neway Gebre-ab, and Governor of 
the National Bank of Ethiopia Teklewold Atnafu.  Senior IMF 
resident representative Arnim Schwidrowski briefed pol/econ 
chief and econoff March 13. 
 
GROWTH DAMPENING INFLATION 
-------------------------- 
 
3.  (SBU) Schwidrowski told pol/econ chief March 13 the IMF 
mission was particularly concerned about rising inflation 
rates.  He said the GOE appears to acknowledge that large 
government public work projects are a significant factor 
behind both inflation and balance of payments problems, but 
attributed the rise in inflation to farmer hoarding.  (Note: 
The IMF and USAID do not consider hoarding by farmers as a 
major contributor to Ethiopia's rising inflation.  End Note.) 
 Schwidrowski said that the IMF advised the government to 
tighten monetary and fiscal policy to dampen demand.  He said 
only time will tell whether the GOE is willing to dampen 
demand to ease inflation. 
 
4.  (SBU) In addition to rising inflation, Schwidrowski said 
that there are some profound imbalances in the economy, 
especially interest rates.  He explained that when bank 
deposits earn 3 percent while inflation runs at 20 percent, 
consumers lose money by leaving it in the bank.  With a 
maximum bank loan rate of 15 percent -- still five percent 
below inflation -- borrowers gain an implicit subsidy of 5 
percent, he said.  This, Schwidrowski continued, promotes 
borrowing for construction projects that can ultimately 
supply rent or other cash flow.  He added that the boom in 
the construction sector reflects this reality. 
 
REFORMS NECESSARY TO SUSTAIN GROWTH 
----------------------------------- 
 
5.  (SBU) Schwidrowski said that another priority of the 
mission was to inform Ethiopia that sustaining current growth 
rates will be difficult without structural reforms to 
diversify the economy and increase productivity.  He added 
that a study by the IMF's Addis office suggested that the 
Ethiopian economy's growth has reached its limit. 
Schwidrowski said that there should be a dialogue with the 
GOE and the World Bank about how to remove key bottlenecks 
that will eventually constrain growth, such as the GOE's 
monopolies in the fertilizer industry and telecom sector and 
near monopoly in the financial sector.  Schwidrowski added 
that the IMF and international donors need to move beyond 
"simply clamoring" for change in the telecom and financial 
sectors. 
 
FOREIGN EXCHANGE RESERVES AND EXTERNAL DEBT 
------------------------------------------- 
 
6.  (SBU) Schwidrowski said that the IMF was concerned that 
foreign aid and remittances would provide for only two and 
half months of import coverage in foreign exchange reserves. 
Schwidrowski said that there was no immediate problem for the 
GOE because both aid flows and remittances were now rising, 
but Ethiopia was vulnerable to shocks such as drought or a 
serious disruption of aid flows/remittances.  The IMF, 
Schwidrowski noted, approved of the GOE's current policy to 
 
ADDIS ABAB 00000776  002.2 OF 002 
 
 
slowly devalue the Birr and said it was a necessary 
adjustment prudently administered. 
 
7.  (SBU) Schwidrowski expressed his concern about debt 
sustainability and Ethiopia's growing indebtedness to China. 
The mission, Schwidrowski explained, was particularly 
troubled about the proposed USD 1.5 billion loan from China 
for modernization of the telecom sector.  The mission urged 
the GOE to carefully evaluate what revenue streams such 
investments would generate and how much growth would be 
impacted before agreeing to the loan.  According to 
Schwidrowski, the mission warned the GOE that it should avoid 
going back into debt for projects that will not pay for 
themselves or boost the economy significantly in the long run. 
 
COMMENT 
------- 
 
8.  (SBU) The IMF mission raised many eyebrows among donors 
and press by publicly repeating questionable GOE numbers on 
annual economic growth.  Likely, the Fund's public support of 
Ethiopia's contested growth statistics was a political 
decision aimed at deepening the relationship and building 
trust.  Thus far, the Fund's praise in public, criticize in 
private strategy seems to be effective at moving the two 
towards greater, though incremental, cooperation. 
WILGUS