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Viewing cable 08ADDISABABA1943, INFLATION PEAKS, THE PUBLIC FEELS THE PINCH

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Reference ID Created Released Classification Origin
08ADDISABABA1943 2008-07-17 08:13 2011-08-25 00:00 UNCLASSIFIED Embassy Addis Ababa
VZCZCXRO9529
OO RUEHROV
DE RUEHDS #1943/01 1990813
ZNR UUUUU ZZH
O 170813Z JUL 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1326
INFO RUCNIAD/IGAD COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP
RUEAIIA/CIA WASHINGTON DC
RHMFISS/CJTF HOA
RUEWMFD/HQ USAFRICOM STUTTGART GE
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RUEKJCS/JOINT STAFF WASHINGTON DC
RHEHAAA/NSC WASHDC
RUEKJCS/SECDEF WASHINGTON DC
RUEKDIA/DIA WASHINGTON DC
RUEHFSC/USOFFICE FSC CHARLESTON 9737
UNCLAS SECTION 01 OF 02 ADDIS ABABA 001943 
 
SIPDIS 
 
STATE FOR AF/EX, OP/OE, ALLOWANCES OFFICE 
 
E.O. 12958: N/A 
TAGS: ALOW ECON PGOV ET
SUBJECT: INFLATION PEAKS, THE PUBLIC FEELS THE PINCH 
 
ADDIS ABAB 00001943  001.2 OF 002 
 
 
1. In June, Ethiopia's general inflation rate hit 55.3 
percent on an annualized basis (from June 2007 to June 2008). 
 Food inflation ticked in at 78.2 percent and cereal 
inflation, as a subset of food inflation, soared 132.5 
percent over the same period.  Cereals include staple grains 
such as teff, wheat, barley, sorghum and corn.  Factors 
contributing to the sharp increase in prices include the 
failure of the Belg rains in many regions earlier this year, 
effectively destroying the short rains harvests that comprise 
15 to 20 percent of Ethiopia's annual agricultural output, 
sharp increases in fuel prices, market inefficiencies, 
uncurbed government spending, and expansionary monetary 
policy. 
 
2. The sharp rise in inflation is unprecedented since the 
reign of the communist Derg regime.  For the past seventeen 
years, Ethiopia has had one of the lowest inflation rates 
among sub-Saharan African countries.  In general, inflation 
has been confined to single-digits during that time. 
However, as a predominantly agrarian economy, Ethiopia has 
had periodic spikes in inflation due to the failure of 
rain-fed harvests as cyclical droughts have from time to time 
depressed agricultural output.  Conversely, recent bumper 
harvests have reduced inflation.  Prior to February, 2008, 
Ethiopia's highest inflation rate was 21 percent, recorded in 
1990/1991 during the aberration of the instability caused by 
the transfer of power from the Derg regime to the current 
ruling Ethiopian People's Revolutionary Democratic Front 
(EPRDF).  However, over the past three years inflation has 
risen steadily despite good rains (until this year) and 
double digit economic growth, finally surpassing the previous 
historical high with a rate of 22.9 percent in February of 
this year. 
 
3. The stability implications of current inflationary 
pressures are unclear at present.  A local journalist told us 
that Ethiopians are used to lean times and adjust there 
lifestyles accordingly.  However, other anecdotal evidence 
suggests that both urban and rural residents are feeling the 
pinch.  The Embassy has received a report of unprecedented 
looting of food stocks, led by students and civil servants, 
in Western Oromiya, near Jima.  In Addis Ababa, the Embassy 
has noticed an up-tick of thefts targeting expatriates and 
middle-class Ethiopians in recent months, including an 
unsuccessful (non-AmCit) home invasion last week.  One 
foreign service national noted that in his Addis Ababa 
neighborhood, elderly women ordinarily confined to the home 
have been spotted begging in the evenings in neighboring 
locales to obtain food to feed their families.  To mitigate 
the adverse impact of the broader drought-related food crisis 
on ordinary Ethiopians, the United States, as Ethiopia's 
leading donor, will provide USD 460 million in food 
assistance (500,000 metric tons), constituting more than 80 
percent of food donations to Ethiopia this year. 
 
4. Comment: While heavy rains in certain areas of the country 
over the past month may eventually ease price pressures for 
staple grains, the next harvest will not come until December. 
 As a result, inflation for food and cereals is expected to 
continue to rise through year's end.  The pending 25 percent 
increase in port fees from Djibouti in mid-August will only 
fuel inflation.  The Ethiopian government has responded by 
importing 1.5 million quintals of wheat in an effort to 
stabilize prices.  Delivery is expected in August.  However, 
Ethiopia's inflationary pressures are generally not tied to 
rises in world commodity prices, as key Ethiopian grains, 
such as teff, are not generally traded in world markets. 
Rather, the inflationary pressures reflect inefficiencies in 
Ethiopia's internal market mechanisms and the failure of 
rains earlier in the year.  Even with a bumper harvest in 
December, food prices may not decline significantly in real 
terms given the other pressures in the economy. Economic 
conditions for ordinary Ethiopians, including our locally 
engaged staff colleagues, will likely get much worse before 
any relief.  The recently zeroed out Post allowance should 
now be raised in response to this inflation and Post will 
look to work with Washington on ways to mitigate the effects 
of this inflation on local staff salaries.  At a minimum, an 
off-cycle raise based on foreign currency gains over the past 
 
ADDIS ABAB 00001943  002.2 OF 002 
 
 
fiscal year (the birr continues to decline against the 
dollar, approximately seven percent over the past nine 
months) would help.  End Comment. 
YAMAMOTO