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Cablegate: Industry Urges Government to Adopt Pro-Market

VZCZCXRO4489
OO RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #1000/01 3111128
ZNR UUUUU ZZH
O 061128Z NOV 08
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3659
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHAR/AMEMBASSY ACCRA 2411
RUEHDS/AMEMBASSY ADDIS ABABA 2531
RUEHRL/AMEMBASSY BERLIN 1031
RUEHBY/AMEMBASSY CANBERRA 1807
RUEHDK/AMEMBASSY DAKAR 2162
RUEHKM/AMEMBASSY KAMPALA 2587
RUEHNR/AMEMBASSY NAIROBI 5015
RUEAIIA/CIA WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/EUCOM POLAD VAIHINGEN GE
RHEFDIA/DIA WASHDC
RUEHGV/USMISSION GENEVA 1680
RHEHAAA/NSC WASHDC

UNCLAS SECTION 01 OF 03 HARARE 001000

SENSITIVE
SIPDIS

AF/S FOR B. WALCH
DRL FOR N. WILETT
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS
STATE PASS TO USAID FOR E. LOKEN AND L. DOBBINS
STATE PASS TO NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN

E.O. 12958: N/A
TAGS: PGOV PREL ASEC PHUM ZI
SUBJECT: INDUSTRY URGES GOVERNMENT TO ADOPT PRO-MARKET
POLICIES

REF: HARARE 646

------
SUMMARY
-------

1. (U) At its recent annual congress held in Harare from
October 28 to 29, 2008 and attended by econ specialist, the
Confederation of Zimbabwe Industries (CZI), with a membership
of around 400 companies covering all sectors of the economy,
condemned the GOZ and the Reserve Bank of Zimbabwe (RBZ) for
implementing poor macroeconomic policies that are inimical to
business growth. Industrialists complained about the policy
inconsistencies and reversals, price controls, collapsing
infrastructure, and absence of property rights and rule of
law. While statistics are notoriously out of date, they
estimated that the manufacturing sector declined by over five
percent in 2007. Members recommended the implementation of
market-friendly policies consistent with those enunciated by
the World Bank and the IMF. In an encouraging development,
the industrial body (heretofore timid) resolved to get more
involved in political and economic discourse to promote
industrial production. END SUMMARY.

----------------------------------------
Policies Blamed for Collapse of Industry
----------------------------------------

2. (U) In a paper presented by the CZI Economic Affairs
Committee, Nigel Chanakira, the Chief Executive Officer of
Kingdom Meikles Limited, identified lack of credit lines due
to arrears, cash and foreign exchange shortages, low capacity
utilization, and poor equipment maintenance as the major
challenges facing industry. He also blamed the shortage of
agricultural inputs for the collapse of most agro-processing
firms. The poor state of the agricultural sector was also
directly linked to the policies of both the GOZ and the RBZ.

3. (U) According to Joseph Kanyekanye, the Group Chief
Executive Officer of Allied Timbers Holdings--who spoke on
the state of the agricultural sector and how it failed to
supply the manufacturing sector with sustainable
inputs--agriculture has declined because of a combination of
adverse weather conditions and poor policies. He stated that
the RBZ had mis-targeted its interventions and had given
people what they did not require. For instance, the RBZ gave
tractors to resettled farmers. Kanyekanye suggested it would
have been wiser to provide them with seed and fertilizer,
rather than with machinery that would require servicing.

4. (U) All of the speakers criticized the RBZ for being
excessively intrusive by taking on the position of a
supra-ministry and dishing money out to all comers. Concerns
were also raised about the unsolicited gift of eight vehicles
that had been donated to CZI by RBZ governor Gideon Gono.
Most delegates felt that Gono was trying to buy favors and
avoid criticism from the industrial sector. Some members
wanted the CZI to devise a plan of paying for the vehicles
since accepting the "gift" would compromise their stance on a
number of negative policies implemented by the central bank.

--------------------------------------------- --
Restore Infrastructure to Restore Manufacturing
--------------------------------------------- --

5. (U) The decay of infrastructure was blamed for reduced
capacity utilization. According to Nyasha Zhou, the Chief
Executive Officer of PG Industries (Zimbabwe) Limited,
pricing controls on electricity, water, phone, and fuel had

HARARE 00001000 002 OF 003


led to under-investment in these areas. In fact, the rate of
investment is less than the asset's usable life, which is
driving down infrastructural quality.

-----------------------------
Implement Pro-Market Policies
-----------------------------

6. (U) Despite the problems afflicting industry, the CZI
believes recovery is possible because Zimbabwe possesses a
well trained and highly-skilled labor force, fertile land,
and mineral deposits, which would form the foundation for
sustainable growth. They contended that these strengths
could only be exploited if the country quickly achieved a
political settlement and implemented sensible macroeconomic
policies that address hyperinflation. In particular, the CZI
proposed that the RBZ concentrate on its core business of
achieving price and exchange rate stability and ensuring a
sustainable balance of payments position, rather than
monetary expansion to support government profligacy. The CZI
recommended that the RBZ desist from involvement in
quasi-fiscal activities that have been at the heart of money
supply growth and inflation.

7. (U) Additionally the CZI proposed that the country
implement policies consistent with those enunciated by the
World Bank and the IMF, namely fiscal rectitude, tight
monetary policies, price liberalization encompassing interest
and exchange rates, and the restoration of property rights.
The foreign exchange constraint was identified as the main
reason for operating below capacity, and could only be
addressed by liberalizing the trade and payments systems.
Although industrialists stated that multilateral and
bilateral financial inflows for balance of payments support
could help, these were not seen as short-term solutions
because the country had to first clear the over US$1.4
billion arrears owed to the multilateral institutions.
Exchange rate liberalization appeared the most appropriate
policy to the CZI as it would generate incentives that would
make it more profitable to export within the short term.

8. (U) The CZI also supported government deregulation of the
agricultural sector by depoliticizing the distribution of
agricultural inputs and the pricing of agricultural produce.
The CZI proposed that there should be a timely disbursement
of inputs while denominating prices in US dollars to preserve
value. They also proposed that resettled farmers be given
security of tenure in order to enable them to use land as
collateral when borrowing from banks, and that government
limit its focus on communal farmers with regard to food
production.

9. (U) While discussing industrial policies, the CZI
emphasized the need to undertake an audit of which firms need
support and which ones have to be allowed to fail based on a
study of dynamic comparative advantages. This would call for
the calculation of potential rather than current effective
rates of protection in order to identify firms that have
future potential comparative advantages. However, in order
to avoid pervasive deindustrialization, delegates proposed
that enterprises be given time to carry out structural
adjustments required to improve their competitive strengths
given that they have not been able to upgrade their plant and
equipment over the past ten years due to the adverse economic
conditions.

10. (U) The CZI called on government to reposition a number
of parastatals that provide utilities but suffer from poor
efficiency. This repositioning would encompass

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private-public partnerships with local and foreign investors
working to resuscitate Zimbabwe's crumbling infrastructure.
Success would be dependent on pricing services with regard to
actual costs incurred, without burdening the consumer with
high administrative costs.

-----------------------------------
Political Settlement a Prerequisite
-----------------------------------

11. (U) In an encouraging sign that industry is now concerned
with the slow pace of political reforms, the CZI resolved to
send a high-powered delegation to President Mugabe, MDC-T
leader Morgan Tsvangirai, and MDC-M leader Arthur Mutambara
to advise them of the dire food situation in the country.
This, they believe, would propel the leaders to quickly
resolve their differences and form an all-inclusive
government required to implement the recommended policies.
The CZI also resolved to get more involved in designing
policies that affected its members.

-------
Comment
-------

12. (SBU) This year's CZI congress marked a significant
departure from previous ones in that delegates openly
criticized bad government policies that have negatively
affected the manufacturing sector. This is an encouraging
sign of possible activism by an industrial body that would be
core to a Zimbabwean recovery. When combined with the
Zimbabwe National Chamber of Commerce's similar recent stance
(reftel), CZI's criticism of the government and proposals
reflect an understanding of Zimbabwe's dire economic
conditions as well as desperation by Zimbabwean business
interests. We are not optimistic, however, that the GOZ will
take note. END COMMENT.


MCGEE

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