BUSINESS CONGRESS BLASTS GOVERNMENT OVER POLICIES

UNCLAS SECTION 01 OF 03 HARARE 000646 SENSITIVE SIPDIS AF/S FOR G. GARLAND ADDIS ABABA FOR USAU ADDIS ABABA FOR ACSS NSC FOR SENIOR AFRICA DIRECTOR B.PITTMAN TREASURY FOR D.PETERS AND T.RAND STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN COMMERCE FOR BECKY ERKUL E.O.12958: N/A TAGS: PGOV PREL ASEC PHUM ECON EAGR EFIN EMIN ZI SUBJECT: BUSINESS CONGRESS BLASTS GOVERNMENT OVER POLICIES Ref: Harare 627 HARARE 00000646 001.2 OF 003 -------------- Summary -------------- ¶1. (U) Members of the Zimbabwe National Chamber of Commerce blasted the government's anti-growth economic policies in the public forum of their annual congress. They bemoaned policy inconsistencies and reversals, the usurpation by the Reserve Bank of Zimbabwe (RBZ) of fiscal policy, price controls, the indigenization policy, and the cash crisis. Striking, and encouraging, was the bluntness of business owners' public criticism of policy. END SUMMARY. -------------- -------------- Business Blames Shifting Policies for Poor Performance -------------- -------------- ¶2. (U) At the Annual Congress of the Zimbabwe National Chamber of Commerce (ZNCC),held in Kadoma July 23-25, 2008 and attended by econ specialist, speakers and delegates bemoaned the government's misguided macroeconomic policies. In business' view, they were inimical to economic growth. In particular, participants in the Congress complained about policy inconsistencies and reversals, price controls, indigenization, and the cash crisis. The approximately 200 ZNCC members at the Congress also discussed the ways in which business was trying to cope. ¶3. (U) Most delegates maintained that policy inconsistency had rendered planning impossible and contributed to the prevailing hyperinflationary environment. Monetary policy had been highly accommodating of fiscal policy for much of Gideon Gono's tenure as Governor of the RBZ. Delegates also bemoaned the lack of policy synchronization between the Ministry of Finance and the RBZ. In particular, they accused the latter of assuming the main functions of the Finance Ministry. ¶4. (U) In the delegates' view, the RBZ was injecting money, not backed by production, into the economy and thus funding government profligacy by printing money. In this regard the RBZ was undermining its mandate to stabilize prices. On top of that, the central bank was applying ineffective instruments in an attempt to control problems of its own creation. Delegates and speakers alike called on the RBZ to concentrate on its core business of ensuring growth, price and exchange rate stability, a sustainable balance of payments position, and full employment. -------------- Subsidized Funds Fuel Bull Stock Market -------------- ¶5. (U) In discussing subsidized RBZ lending, ZNCC members felt that business faced more pressing constraints than the lack of credit. In fact, they said most firms redirected concessionary funds into the Zimbabwe Stock Exchange (ZSE) where they could earn real positive returns, rather than using them to undertake the risky business of production. Addressing the congress, Emmanuel Munyukwi, CEO of the ZSE, said the bourse grew by 15,034 percent on a month-on-month basis in June 2008, which exceeded the 6,900 percent depreciation of the Zimbabwe dollar against the U.S. dollar on the parallel market in the same period. In the same vein, most delegates believed that the recently launched BACOSSI 2 "supply enhancement" program would cause the economy more harm than good. The program used scarce foreign exchange to import goods at the expense of local producers who could manufacture the same commodities if they only had foreign exchange. Commodity imports equated to job exports and higher unemployment, in the members' view. HARARE 00000646 002.2 OF 003 -------------- Cash Crisis Blamed on RBZ -------------- ¶6. (U) Congress participants noted with concern the prevailing cash crisis (reftel),and attributed it to the low daily cash withdrawal limit of Z$100 billion (about 65 U.S. cents on the parallel cash market) imposed by the RBZ. (NOTE: The RBZ raised the limit to Z$2 trillion effective August 1. END NOTE.) They blamed the wide divergence between the parallel market rate for cash and the bank-transfer (RTGS) rate on the cash crisis, and appealed for the elimination of daily cash withdrawal limits and for a single foreign exchange rate. Simukai Mutamangira, the Managing Director of the POSB (People's Own Savings Bank, formerly Post Office Savings Bank) maintained that the informal sector held the bulk of cash in circulation. He criticized RBZ policies as well as the practice by some commercial banks of purchasing foreign exchange on the parallel market; it had the double negative effect of creating cash shortages as well as fuelling depreciation of the currency. He called on the RBZ to end its denial, recognize that businesses were quoting prices in U.S. dollar terms to preserve value, even though it was illegal, and adjust policies accordingly. At the individual level, many delegates admitted that they regularly converted their own local currency earnings into U.S. dollars on the parallel market to preserve value. -------------- -------------- Price Controls - Another Blow to a Struggling Economy -------------- -------------- ¶7. (U) Delegates concurred that rather than reduce inflation, price controls had fuelled it and spawned the current commodity shortages. The controls had forced manufacturers either to cut production or close down completely. They had also distorted the incentive structure within the economy by implicitly encouraging manufacturers to sell their output through informal markets to remain viable rather than through price-controlled formal channels. In the end, the average Zimbabwean paid far higher prices for goods than if the government had never imposed price controls. -------------- Wrong-Headed Indigenization Policy -------------- ¶8. (U) Delegates in general were critical of the government's track record in indigenization of the economy. It had benefited only a few politically connected people at the expense of the majority. ZSE's Munyukwi disagreed with the government's assertion that the economy was dominated by foreigners, and said the government should have consulted more closely with the business community before enacting the indigenization bill. He said 90 percent of investors in the ZSE were institutional investors, 8 percent were retail investors, and only 2 percent were foreign investors. Furthermore, foreign ownership on the ZSE had declined from 30 percent in 1997 to the current 2 percent. Delegates then asked whether the government was "barking up the right tree," as the economy appeared to be already largely in the hands of indigenous Zimbabweans. -------------- Re-Capitalizing SMEs -------------- ¶9. (U) Unsurprisingly, as most ZNCC members are small to medium-sized enterprises (SMEs),the delegates welcomed a proposal by Munyukwi to establish a secondary bourse to cater for SMEs that otherwise had limited sources of funds. Lamenting the deplorable state of their factories, most delegates saw the stock exchange as HARARE 00000646 003.11 OF 003 an attractive funding source for their re-capitalization. -------------- COMMENT -------------- ¶10. (SBU) Striking, and encouraging, was the bluntness of business owners' public criticism of Zimbabwe's economic policy. In private discussions they recommended drastic political and economic reforms. There is clearly no lack of understanding in the Zimbabwe business community as to where the GOZ has gone wrong in policies - what it comes down to now is mustering the political will to reform. In that regard, the business community has set its hopes on the current inter-party negotiations. In the meantime, more of the same policies will only accelerate the economy's free fall. END COMMENT. MCGEE