Visit of Treasury Under Secretary for

UNCLAS SECTION 01 OF 04 PRETORIA 004252

SIPDIS

SENSITIVE

TREASURY FOR OAISA/JEWELL

E.O. 12958: N/A
TAGS: EFIN EAID ETRD OTRA SF
SUBJECT: Visit of Treasury Under Secretary for
International Affairs John B. Taylor

REF: Cape Town 536 (NOTAL)

SENSITIVE BUT UNCLASSIFIED; PROTECT ACCORDINGLY.


1. (SBU) Summary. Treasury U/S Taylor and DAS
Fratto sought support from South African Finance
Minister Manuel to a U.S. proposal to move from loans
to grants for HIPC countries in the multilateral
development banks. The Minister agreed that the HIPC
program had lowered debt levels for participating
countries but raised numerous questions about the
proposal, including possible institutional affects
and the long-term sustainability of donor flows to
IDA and the AfDF. U/S Taylor told Manuel that the
U.S. could not support the IFF and that global taxes
for development were politically unacceptable. In a
separate meeting, U/S Taylor and Reserve Bank
Governor Mboweni discussed an IMF staff proposal to
provide technical assistance to HIPC countries
without requiring that a Fund program be in place.


2. (U) In Cape Town, U/S Taylor and DAS Fratto met
with South African apparel and wine exporters
benefiting from AGOA, and in Johannesburg, the
Treasury officials visited a former township to see a
range of low-income housing initiatives, including
those benefiting from the USG/s African Mortgage
Markets Initiative. Public diplomacy aspects of U/S
Taylor's visit are reported in reftel. End Summary.

U.S. Proposal for IDA Grants
--------------


3. (SBU) In a September 8 Cape Town dinner meeting,
Treasury Under Secretary for International Affairs
John Taylor and DAS Tony Fratto discussed with
Finance Minister Trevor Manuel and senior National
Treasury officials a U.S. proposal to move from loans
to grants for HIPC countries in the multilateral
development banks (MDBs). U/S Taylor explained that
the HIPC initiative had not succeeded in reducing the
debt burden. HIPC countries found themselves in an
absurd situation. They must borrow to repay debt.
U/S Taylor said the donor community needed to find a
way to stand down on debt while keeping resources
flowing for developing countries. If donors did not
find a way to stop the build up of debt, MDB resource
flows would be wasted.


4. (SBU) Finance Minister Manuel said he agreed
with the diagnosis, but he was not sure of the
treatment. He was worried about the unintended
consequences of the idea. He said the proposal to
shift to grants could imply fundamental change in the
World Bank as an institution. For the Minister, the
AfDB/F was the key question. Changing the funding
structure might destroy the institution. AfDB/F
issue needs a separate look in his view. The
Minister also expressed concern about the long-term
sustainability of donor flows. He stated that the
IDA pool of funds is currently not large enough to
meet Millennium Development Goals. He asked what is
the security of income to IDA? Will the U.S.
Congress continue to support resources for IDA?


5. (SBU) U/S Taylor explained that the U.S. idea
did not represent institutional change. IBRD loans
would not be affected. The focus was strictly HIPC.
Taylor agreed that sustaining flows was the key
question and explained that the U.S. proposal would
not reduce resources. In fact, IDA and other soft
loan institutions, such as the AfDF, would actually
get more funds. Taylor pointed out that IDA would
always depend on donor funding. It will never be
self-sustaining. He added that there was also a
moral question of using reflows from countries like
Ethiopia to pay for development in Niger. U/S Taylor
said he had a higher degree of confidence in donor
countries funding IDA than developing countries
repaying IDA loans. In fact, IDA 14 contributions
would be higher. U/S Taylor said he was optimistic
that the U.S. Congress would support grant funding,


6. (SBU) Ambassador Frazer added that HIPC simply
was not working. We needed to change our approach to
get HIPC countries to a sustainable level of
development. The Ambassador said the international
community had a window of opportunity to move ahead;
we should not let the perfect be the enemy of the
good. She emphasized that there is no political gain
for U.S. in its proposal.


7. (SBU) Manuel noted that there are two other
proposals on the table that would increase ODA to
developing countries: the International Financing
Facility (IFF) and some form of a global tax. While
acknowledging that the U.S. had problems with the
IFF, the minister said the international community
needed to understand and explore the issues with the
IFF and global taxation proposals. He noted that the
U.S. proposal to move to grants in the MDB's and the
other initiatives should not be seen as mutually
exclusive.


8. (SBU) U/S Taylor replied that the IFF was fine
if the Europeans wanted to pursue it, but the U.S.
simply could not do it based on our own laws. The
international tax was a non-starter: it would not fly
domestically in the U.S.


9. (SBU) U/S Taylor said he believed the U.S. idea
would be popular with African countries, as they
would benefit most. He said the U.S. would like
South African and international support and asked for
Manuel's advice on how to approach others to discuss
the proposal. The Minister suggested that the U.S.
would need to address the systemic issues for the
IBRD and regional institutions; answer questions of
resource adequacy and flexibility; include ideas on
the re-financing of existing loans; and think through
the long term effects to create buy-in. Manuel also
opined that the proposal was too easy for donor
countries. The real need was for more multilateral
funds.

FTA Negotiations
--------------


10. (SBU) U/S Taylor also discussed briefly with
Minister Manuel, a former trade minister, the U.S.-
SACU FTA negotiations. He noted that an FTA was the
logical next step to build on the success of AGOA.
He hoped the U.S. and SACU would move expeditiously
to conclude the agreement by the end of the year.
Manuel noted that he was "a bit of a purist" on trade
issues, favoring an emphasis on multilateral
negotiations. The Under Secretary commented that the
U.S. was determined to move ahead on all trade
fronts: multilateral, regional and bilateral.

AGOA Helps the Apparel Industry
--------------


11. (U) Following a September 9 breakfast briefing
with South African journalists (reftel),U/S Taylor
and DAS Fratto visited the House of Monatic, a
clothing manufacturer producing for the South African
and international market. Among those participating
in the boardroom session were Fred Robertson, chief
executive officer for Brimstone Investment Holdings,
a Black Economic Empowerment company that owns House
of Monatic; Brian Buckingham, manager for Monatic;
and Jack Kipling, executive officer of the Clothing
Export Council. House of Monatic employs over 1,000
workers and produces on the export side for
Nordstrom, J.C. Penny, Dillards, and others in the
U.S.


12. (U) Jack Kipling reported that AGOA was
responsible for the creation of 12,000 new jobs in
South Africa. He argued that it has been largely
South African factors that have inhibited greater
growth, including the high rand and the inability of
local textile producers to provide sufficient fabric
in a timely manner. Wage differentials are also
hurting South African competitiveness with an average
of about USD 2.05 paid per hour in Cape Town, placing
it on par with Turkey. The South Africans, Kipling
reported, were feeling especially keen competition
from Madagascar and Mozambique, where labor cost per
hour were well below 75 US cents per hour. Other
factors cited by participants as responsible for
dampening growth were the absence of direct U.S.
foreign investment in clothing and a lack of interest
in South African production on the part of U.S.
textile suppliers. Robertson noted the importance of
the clothing industry in job creation. He reported
on Brimstone's recent acquisition of a jean
production plant, formerly owned by a Chinese company
in Atlantis, a depressed community north of Cape
Town, as a means of creating new jobs.


13. (U) On the negotiations for the FTA with SACU,
Jack Kipling laid out the industry's position saying
it fully supports an FTA, seeks to build a vibrant,
sustainable clothing industry with as many as 500,000
jobs, and wants a regime that will allow greater
South African access to third country fibers, even if
it was only for a specified transition period of
perhaps 15 years. Without substantial growth,
Kipling feared the South African clothing industry
would wither. A tour of House of Monatic operations
followed the boardroom session.

Wine Exports, Too
--------------


14. (U) In conjunction with the Wines of South
Africa, (South Africa's wine industry export
council),Charles Back, owner of Fairview Estates in
Paarl, hosted a small lunch for the U/S Taylor and
DAS Fratto. Owner of a third generation-farm, Back
has employed clever marketing strategies and catchy
titles to attract attention in the U.S. and Europe.
His Goats do Roam blend of red wine have made
considerable headway in the U.S., reportedly selling
over 1.2 million bottles in 2003. Back attributed
his success to his ability to establish good and
often personal working relations with American
importers. Overall, individual makers like Back and
marketing strategists at WOSA aim at cutting into the
share of the market they believe overly dominated by
Australia with good products at the lower end of the
price spectrum.

Economy Finally Creating Jobs
--------------


15. (SBU) At the Governor's request, U/S Taylor and
DAS Fratto met over breakfast September 10 in
Pretoria with South African Reserve Bank Governor
Tito Mboweni. Gov. Mboweni noted that, although the
numbers were small, the South African economy was
finally beginning to create jobs, particularly in the
mining, manufacturing and construction sectors. He
expressed concern about the continued growth of the
services sector as a percentage of GDP. This sector
would not absorb many of South Africa's poorly
skilled unemployed. The Governor concurred with U/S
Taylor's comment on the value of AGOA to Africa;
however, he suggested that the U.S. try to do more to
reduce non-tariff barriers. Econ M/C pointed out
that the U.S. was already helping in this area, for
example through USDA's APHIS, which worked closely
with SA exporters. Mboweni felt that South Africa
would see the benefits of more open trade over the
coming 4-5 years with improved productivity.

Assisting African Central Banks
--------------


16. (SBU) U/S Taylor raised with Governor Mboweni a
recent IMF staff proposal to provide technical
assistance to HIPC countries without requiring that a
Fund program be in place. U/S Taylor pointed out the
program would be strictly voluntary. He noted that
initial reaction from HIPC countries was positive and
that some emerging market economies were also
interested.


17. (SBU) Mboweni noted that many African countries
want this type of assistance but are reluctant to
call on the IMF due to its reputation: they prefer
bilateral programs. He stated that South Africa had
central bank technical assistance programs with all
13 other SADC members, plus Rwanda, Gambia and other
African countries. He said that fortunately he had
recently retired Reserve Bank staff that could
provide the assistance but that it was "costing me
money." He noted that he recently told Egyptian
officials that the first thing to do was give the
central bank independence. He noted that this was a
hard message for many African governments to accept.

Housing Finance
--------------


18. (U) Prior to departure, U/S Taylor and DAS
Fratto toured Alexandra, a former township adjoining
Johannesburg's Sandton suburb. U/S Taylor saw a
range of low-income urban housing, from squatter
camps to government-provided single rooms houses to
modest single-family homes typical of houses that
will be insured through USAID-guaranteed mortgage
insurance programs, in conjunction with South
Africa's Home Loan Guarantee Company. U/S Taylor
also received a briefing on innovative OPIC-supported
program that will support HIV/AIDs treatment for
those who purchase the insurance product, enabling
them to continue working and earning an income,
maximizing their ability to provide support to their
families. U/S Taylor noted the benefits of both
programs, part of the USG's African Mortgage Markets
Initiative.


19. (U) DAS Fratto cleared this message. Frazer