Business accuses Gono of assuming functions of Ministry of Finance

Members of the Zimbabwe National Chamber of Commerce blasted the government for policy inconsistencies and reversals and accused the Reserve Bank of Zimbabwe of usurping the functions of the Ministry of Finance.

Speaking at their congress held just a month after the presidential elections run off the delegates bemoaned the lack of policy synchronisation between the Ministry of Finance and the Reserve Bank of Zimbabwe accusing the RBZ of assuming the main functions of the Ministry of Finance.

The delegates accused central bank governor Gideon Gono of injecting money, not backed by production, into the economy and thus funding government profligacy by printing money.

They said the RBZ was undermining its mandate to stabilise prices. On top of that, the central bank was applying ineffective instruments in an attempt to control problems of its own creation.

They called on the central bank to concentrate on its core business of ensuring growth, price and exchange rate stability, a sustainable balance of payments position, and full employment.

Full cable:

Viewing cable 08HARARE646, BUSINESS CONGRESS BLASTS GOVERNMENT OVER POLICIES

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UNCLAS SECTION 01 OF 03 HARARE 000646

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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

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Summary

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¶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.

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Business Blames Shifting Policies for Poor Performance

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¶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

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Cash Crisis Blamed on RBZ

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¶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.

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Wrong-Headed Indigenization Policy

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¶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.

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Re-Capitalizing SMEs

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¶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.

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COMMENT

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¶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

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