Zimbabwe forecasts first positive growth in a decade

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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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

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RUEHGV/USMISSION GENEVA 2258

RHEHAAA/NSC WASHDC

UNCLAS SECTION 01 OF 03 HARARE 000624

SENSITIVE

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AF/S FOR B. WALCH

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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

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