Finance Minister Tendai Biti said Zimbabwe was expected to have a positive growth of 3.7 percent in 2009, the first positive growth in a decade.
The economy had declined by a cumulative 48 percent between 2000 and 2008.
Agriculture, which was projected to grow by 24.3 percent, was going to contribute most of the recovery.
Biti also expected manufacturing and tourism to contribute to the positive growth.
He said capacity utilisation in manufacturing had improved from 5 percent to 25 to 30 percent between January and June 2009.
The mining sector was, however, expected to decline by 11.2 percent due to low prices of metals such as nickel and asbestos.
Construction was also forecast to decline.
Full cable:
Viewing cable 09HARARE624, MID-YEAR FISCAL REVIEW SETS RIGHT TONE FOR RECOVERY
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Reference ID |
Created |
Released |
Classification |
Origin |
VZCZCXRO0322
OO RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0624/01 2111501
ZNR UUUUU ZZH
O 301501Z JUL 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4769
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHAR/AMEMBASSY ACCRA 2963
RUEHDS/AMEMBASSY ADDIS ABABA 3080
RUEHRL/AMEMBASSY BERLIN 1509
RUEHBY/AMEMBASSY CANBERRA 2343
RUEHDK/AMEMBASSY DAKAR 2710
RUEHKM/AMEMBASSY KAMPALA 3128
RUEHNR/AMEMBASSY NAIROBI 5571
RUEAIIA/CIA WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/EUCOM POLAD VAIHINGEN GE
RHEFDIA/DIA WASHDC
RUEHGV/USMISSION GENEVA 2258
RHEHAAA/NSC WASHDC
UNCLAS SECTION 01 OF 03 HARARE 000624
SENSITIVE
SIPDIS
AF/S FOR B. WALCH
DRL FOR N. WILETT
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS
STATE PASS TO USAID FOR J. HARMON AND L. DOBBINS
STATE PASS TO NSC FOR SENIOR AFRICA DIRECTOR MICHELLE GAVIN
E.O. 12958: N/A
TAGS: ECON EMIN ETRD PGOV PHUM PREL ZI
SUBJECT: MID-YEAR FISCAL REVIEW SETS RIGHT TONE FOR RECOVERY
——-
Summary
——-
¶1. (SBU) The mid-year fiscal review by Finance Minister
Tendai Biti upgraded the economic growth forecast from 2.8
percent to 3.7 percent due to a projected 24.3 percent growth
in agriculture and an anticipated upturn in business
confidence arising from implementation of policies contained
in the Short Term Economic Recovery Program (STERP). The
proposed suspension of import tariffs on capital goods and
raw materials is likely to improve capacity utilization in
industry overall, though the reintroduction of royalty
payments in the gold sector may dampen its nascent recovery.
The lack of affordable credit continues to constrain
industry’s ability to take advantage of regulatory
improvements. END SUMMARY.
——————————–
Economy forecast to grow in 2009
——————————–
¶2. (SBU) In his mid-year fiscal review statement to
Parliament on July 16, 2009, Minister of Finance Tendai Biti
projected that the economy, which declined by a cumulative 48
percent between 2000 and 2008, would grow by 3.7 percent in
¶2009. Biti stated that agriculture would contribute most to
this recovery, with a projected growth rate of 24.3 percent
growth due to a number of initiatives including direct
budgetary allocations, subsidized credit and increased
demand. Biti told Parliament that long-term growth in
agriculture would largely depend on restoration of security
of tenure on land and “strengthening property rights in the
form of long leases, title deeds and certificates of
occupation.”
¶3. (SBU) The Minister expected the manufacturing and tourism
sectors to contribute positively to the projected growth due
to the policy effects of STERP. He advised Parliament that
capacity utilization among manufacturers had improved from
around five percent to 25 to 30 percent between January and
June 2009. Biti stated that the mining sector was expected
to decline by 11.2 percent in 2009 due to low prices of
metals such as nickel and asbestos. Construction was also
forecast to decline in 2009.
————————————
Inflation expected to remain subdued
————————————
¶4. (SBU) Biti told Parliament that implementation of prudent
policies resulted in the country recording month-on-month
deflation between January and May 2009, aQhough the rate of
decline in more recent months was lower due to monopolistic
pricing by public enterprises and local authorities. The
Finance Minister said inflation control had been aided by
dollarization, and the inability to print money had forced
the government to live within its means. He implored local
authorities, parastatals and businesses to act responsibly
when reviewing rates and setting prices to avoid reigniting
inflation. On this basis, he projected that inflation would
end the year at 6.4 percent, down from the 6.9 percent
Qend the year at 6.4 percent, down from the 6.9 percent
forecasted at the beginning of March 2009.
———————————
Financial sector to be overhauled
———————————
¶5. (SBU) Biti said that the financial sector had been
adversely affected by the hyperinflationary environment and
HARARE 00000624 002 OF 003
by 2008 bank assets were a quarter of their 2004 value. He
told Parliament that most institutions responded to this
erosion of value by closing branches in rural areas, leaving
65 percent of the population without ready access to banking
services; savings needed to finance investment were
consequently affected. He expressed confidence that recovery
in the financial sector was progressing, pointing to the
growth in deposits from US$200 million in February to US$706
million by the end of June. Biti bemoaned the low
loans-to-deposit ratio of only 37.3 percent, urging banks to
do more to raise the ratio. He urged banks to raise deposit
interest rates and he suspended the 10 percent withholding
tax on interest payments to non-residents to attract more
deposits. His goal was to raise deposits from 4 percent of
GDP to 25 percent. Biti also removed the 5 percent tax on
bank profits and promised to review cutting reserve
requirements to improve market liquidity.
¶6. (SBU) Biti told Parliament that 15 of the 28 financial
institutions in the country had complied with the minimum
capital requirements ahead of the September 2009 deadline,
leaving 13 below the threshold. He said he decided to phase
in the minimum capital requirements, proposing that banks
achieve 50 percent of the expected capital by the end of
September 2009 and 100 percent by the end of March 2010.
—————————–
Rest in eace Zimbabwe dollar
—————————–
¶7. (SBU) Biti completed the process of dollarization by
demonetizing the remaining Zimbabwe dollar cash in
circulaQon and balances with financial institutions. He set
aside US$6 million to purchase the remaining stock of
Zimbabwe dollars. He further ruled out the return of the
Zimbabwe dollar until the country developed a sustainable
external position and a strong financial sector capable of
supporting and sustaining its own currency.
————————————–
Reforming the Reserve Bank of Zimbabwe
————————————–
¶8. (SBU) The Finance Minister told Parliament that the
government had agreed on proposed changes to the Reserve Bank
Act designed to enshrine the institution’s operational
independence, forcing it to concentrate on its core business
of supervising and regulating the financial and monetary
system. He also said that the government would recapitalize
the RBZ once the process of establishing the assets and
liabilities of the institution had been completed.
————————————–
Budget performance to June commendable
————————————–
¶9. (SBU) Biti told Parliament that between January and June
2009, the government managed to collect US$285.4 million
against a target of US$321.2 million, with the bulk of the
money coming from value-added tax (US$110.5 million), customs
duty (US$90.9 million) and pay-as-you-earn income tax (PAYE)
Qduty (US$90.9 million) and pay-as-you-earn income tax (PAYE)
(US$47.9 million). Biti noted that total expenditures were
US$257.2 million, of which US$156.5 million went to
allowances for civil servants and grant-aided institutions.
He proposed that civil servants be paid salaries instead of
allowances by the end of July. Salaries will be partly
funded through unconfirmed donor support of US$391 million.
During the period covered by his statement, Biti said only
US$10.4 million was spent on capital projects against a
target of US$31.8 million.
HARARE 00000624 003 OF 003
—————————-
Duties on most items reduced
—————————-
¶10. (SBU) Biti suspended import duties on capital goods and
on most raw materials to support local industry to modernize
plant and equipment and to raise capacity utilization from
the current 25 percent to 60 percent by year’s end. Import
duty on intermediate goods was also reduced from 10-15
percent to just 10 percent. He cut import duties on fuel,
replacing it with an excise duty of US20 cents per liter for
petrol and US16 cents for diesel. He extended the suspension
of customs duties on some basic commodities to the end of
December 2009 because of the positive effect this would have
on food supply and inflation. Only cigarettes and tobacco
had excise duty increased from 60 to 80 percent. Biti
alluded to additional changes meant to simplify the tax
structure in the 2010 budget due at the end of November 2009.
——————————-
Royalties re-introduced on gold
——————————-
¶11. (SBU) As promised in the March budget review statement,
the Finance Minister re-introduced the three percent royalty
on gross revenue from gold that was suspended in 2004.
According to Biti, the tax was appropriate given that most
gold mines had reopened following the liberalization of gold
marketing earlier this year.
——-
Comment
——-
¶12. (SBU) Biti’s mid-term fiscal review statement contains
economically-sound, pro-growth policies. The suspension and
reduction of duties on capital goods, raw materials and
intermediate goods is likely to result in supply increases by
firms which found it difficult to replace plant and equipment
during hyperinflationary times. However, credit remains a
major constraint as most Zimbabwean banks are unable to
access foreign lines of credit due to the country’s poor
credit profile–a profile which has been undermined by
political infighting in the inclusive government. A worrying
aspect of year-to-date budget performance is the continued
State underinvestment on capital spending, which fails to
support Biti’s goal of raising capacity utilization. END
COMMENT
DHANANI
(53 VIEWS)
