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Cablegate: Bfif Funding Once Again Catalyzes Private Sector

VZCZCXRO0431
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #1002/01 3111448
ZNR UUUUU ZZH
P 071448Z NOV 07
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 2099
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHUJA/AMEMBASSY ABUJA 1761
RUEHAR/AMEMBASSY ACCRA 1637
RUEHDS/AMEMBASSY ADDIS ABABA 1768
RUEHBY/AMEMBASSY CANBERRA 1045
RUEHDK/AMEMBASSY DAKAR 1394
RUEHKM/AMEMBASSY KAMPALA 1825
RUEHNR/AMEMBASSY NAIROBI 4253
RUEHGV/USMISSION GENEVA 0891
RHEHAAA/NSC WASHDC
RHMFISS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC//DHO-7//
RUCPDOC/DEPT OF COMMERCE WASHDC
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK//DOOC/ECMO/CC/DAO/DOB/DOI//
RUEPGBA/CDR USEUCOM INTEL VAIHINGEN GE//ECJ23-CH/ECJ5M//

UNCLAS SECTION 01 OF 05 HARARE 001002

SIPDIS

SENSITIVE
SIPDIS

STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN
TREASURY FOR J. RALYEA AND T.RAND
COMMERCE FOR BECKY ERKUL
EEB/EX GAYLE GRAY
EEB/CBA DENNIS WINSTEAD

E.O. 12958: N/A
TAGS: ECON EINV PGOV ZI
SUBJECT: BFIF FUNDING ONCE AGAIN CATALYZES PRIVATE SECTOR
DISCUSSIONS ON TURNAROUND

REF: A. HARARE 0964

B. HARARE 0951
C. HARARE 0657
D. HARARE 0598
E. 2006 HARARE 01317

1. (U) This is an action request. Please see paragraph 13.

-------
Summary
-------

2. (SBU) On October 2, for the second consecutive year, the
American Business Association of Zimbabwe (ABAZ), generously
supported by the Business Facilitation and Incentive Fund
(BFIF) and the private sector, held a high-profile day-long
economic forum under the theme "Just Business" to identify
and deliberate over solutions to Zimbabwe's economic
problems. Presentations by speakers from the World Bank,
academia, government and business focused on two subjects:
other developing countries' experience in taming
hyperinflation; and the importance of secure property rights
in creating wealth and attracting investment. About 220
delegates attended the forum and accompanying mini-trade fair
at which 26 companies found the courage, in an
anti-business/anti-American climate, to exhibit under the
banner of an American association. Due to unforeseen
circumstances, the event made a small loss. Post is seeking
early FY08 BFIF funding to close the gap and enable ABAZ to
continue its outreach. Looking ahead, ABAZ intends to
disseminate the proceedings to the media, take key messages
directly to government officials and parliamentarians, and
begin a series of workshops on the South African experience
with black economic empowerment as an alternative to the
indigenization policy now under discussion. End Summary

-------------------------------------------
BFIF Support Spurs Business Group to Action
-------------------------------------------

3. (U) On October 2, the American Business Association of
Zimbabwe, supported generously by the State Department's
Business Facilitation and Incentive Fund (BFIF) and by 12
leading companies as primary sponsors, including Stanbic
Bank, RioTinto and Murowa Diamonds, held a high-profile
day-long economic forum under the theme "Just Business" at
Harare's premier convention facility, the Celebration Center.
This was a sequel to last year's forum (Ref E) that opened
up a private sector-led public discussion about the key
economic policy reforms needed to right Zimbabwe's course.
This year, in an especially daunting anti-business,
anti-American climate (Ref C), the organizing committee drew
on speakers from Zambia, the U.K. and the U.S. to engage in
constructive discussion of the way forward for the Zimbabwean
economy.

--------------------------------------------- --------------
Macroeconomic Stabilization ) Lessons From Around The World
--------------------------------------------- --------------

4. (U) Opening the forum was Dr. Kapil Kapoor, the World
Bank's country manager in Zambia and former deputy country
manager in Zimbabwe. He reviewed Zimbabwe's deteriorating
economic and social indicators and described the experiences
of 24 countries with hyperinflation between 1980 and 2005.
He pointed out that high inflation could last as long as 48
months (Zaire in 1991-1994), then described three key

HARARE 00001002 002 OF 005


elements of successful economic stabilization: up-front large
fiscal adjustment, including elimination of quasi-fiscal
activities; monetary adjustment with a focus on price
stability and the establishment of monetary credibility
through central bank independence; and exchange rate
adjustment, again, up-front and close to the prevailing
parallel market rate. The measures should be accompanied by
social safety nets for vulnerable people and policy reforms
to remove microeconomic distortions (civil service reform,
agricultural reform, etc.). Kapoor summarized that
front-loaded programs were more successful in gaining
credibility and taming inflationary expectations than a
gradual approach; positive stabilization results could be
achieved quickly; and about half of the cases examined had
official external financing similar to that of Zimbabwe (4
percent of GDP) and no IMF program at the outset. In all
cases, private capital flows tended to follow stabilization.

5. (U) Widely regarded as the most effective speaker of the
day, elder statesman, Vice Chancellor of the University of
Zambia, and former Governor of the Reserve Bank of Zambia in
the 1990s, Dr. Jacob Mwanza recounted one failed Zambian
policy after another during Zambia's 25-year long pursuit of
a socialist development model. His recitation of past price
and foreign exchange controls, empty foreign currency
coffers, falling production, record-breaking sovereign debt
and budget deficits in Zambia, eerily echoed the Zimbabwe
situation today. The cornerstone of Zambia's reforms as it
embraced a capitalist development model consisted of the
privatization of state-owned entities, freeing up the prices
of goods and services, repealing the Exchange Control Act,
allowing the market to determine exchange rates, and civil
service reform. Mwanza also described Zambia's successes in
diversifying the economy beyond its core copper industry into
agriculture and tourism, and the strong growth, foreign
reserves, and trade balance that Zambia now enjoyed, along
with low inflation.

6. (U) Professor Steve Hanke of Johns Hopkins University
presented on "Overcoming Hyperinflation ) Possible
Solutions" in an audiovisual recording, as he was unable to
attend the forum in person. Having served as advisor to an
impressive list of governments in Latin America, the Balkans
and former Soviet Union, he drew upon his forthcoming book
"Zimbabwe: Hyperinflation to Growth," and zeroed in on the
pros, cons and mechanics of exchange rate stabilization using
dollarization or currency boards.

--------------------------------------------- --------------
Property Rights and Resuscitating the Ag and Mining Sectors
--------------------------------------------- --------------

7. (SBU) Craig Richardson, Professor of Economics at Salem
College in North Carolina, returned to the ABAZ forum this
year to address "Property Rights and their Implications for
Investment and Economic Growth." Once again, he showed
striking visual evidence of the cost of destroying property
rights in the agricultural sector. Using satellite photos of
abutting commercial and communal properties, he demonstrated
that those who owned their own land had greater incentives to
maintain and enhance it. Using examples of strengthened
property rights in Tanzania and Niger, Richardson argued that
all citizens should hold secure property rights to prevent
land degradation and gain collateral for land improvements.
On the margins of the event, we arranged meetings for Prof
Richardson with leaders of the Confederation of Zimbabwe
Industries (CZI), the Commercial Farmers' Union (CFU), the

HARARE 00001002 003 OF 005


Horticultural Promotion Council, and the Compensation
Coalition. In the expectation that Prof. Richardson would
continue to publish articles on property rights in Zimbabwe,
as he did after last year's visit, we also arranged visits
for him to commercial, communal and resettled farms over the
course of his six-day stay.

8. (U) Closing the forum was Dr. Andrew Mackenzie, chief
executive of diamonds and minerals at Rio Tinto, which owns
77.8 percent of Zimbabwe's Murowa diamond mine. He recalled
Zimbabwe's bygone strength as an African mining country,
mining legislation that he said was once the best in Africa,
and the strong infrastructure that supported the industry in
Zimbabwe. Mackenzie called attention to Rio Tinto's
leadership in respecting the rights of traditional people and
its foundation membership of the Kimberley Process. Striking
in Mackenzie's slides was Rio Tinto's net investment in
developing the Murowa site and the size of the monetary
benefits to Zimbabwe in wages paid, payments to the
state-owned Minerals Marketing Corporation of Zimbabwe
(MMCZ), withholding taxes, corporate taxes, royalties,
dividends and payments to local suppliers. Mackenzie did not
neglect to describe Rio Tinto's more than 50 years of
financial and social investment in Zimbabwe. He also
emphasized Rio Tinto's endorsement of broad-based economic
empowerment and local partnerships in its South African
operations, while also advocating for risk protection for
local investors.

--------------------------------------------- -----------
U.S.-Friendly Companies Wave the Flag at Mini-Trade Fair
--------------------------------------------- -----------

9. (SBU) Despite strong anti-business/anti-U.S. rhetoric in
the state-owned press and government circles in the months
ahead of the event, 26 companies exhibited at the
concurrently held mini-trade fair. The exhibitors
represented a range of U.S. or U.S.-affiliated companies
(Cargill, Chevron, Schweppes, Ernst & Young, Deloitte,
Western Union, Pioneer Seed, among others), companies with
significant U.S. investment or shareholding (Imara Asset
Management, Murowa Diamonds), and also several small or
U.S.-friendly local companies (PSI condom distributor,
Econet, The Independent local newspaper, several electronics
distributors). Except for the aggressive young mobile
telephone company Econet, owned by Zimbabwe exile Strive
Masiyiwa, which offered free GPRS service to all delegates,
none of the companies appeared to use the forum as an
opportunity to win new business; their intent for the most
part was to show solidarity with the vision of the American
Business Association of Zimbabwe: "to promote optimum
conditions for business to make maximum contributions to
economic growth in Zimbabwe."

------------------------
But Others - Intimidated
------------------------

10. (SBU) Dishearteningly, PricewaterhouseCoopers (PWC),
which was the primary sponsor of last year's forum, and U.S.
tobacco giant AllianceOne, explicitly requested no public
recognition of any sort for their financial support of the
event. Similarly, numerous ABAZ members and other companies
with U.S. interests told the organizers that they declined
even the lowest level of sponsorship out of fear of
recrimination by government. The Independent was only able
to secure two advertisers for its supplement on the forum,

HARARE 00001002 004 OF 005


but Group Chief Executive Officer Raphael Khumalo, who
attended the forum, told econoff on October 26 that he had no
regrets about sponsoring the event and looked forward to
publishing excerpts of the proceedings in the weekly
newspaper. PWC senior partner Tinashe Rwodzi told econoff on
November 7 that in reviewing the event, which he attended,
PWC decided it had erred in not lending greater public
support.

--------------------------------------------- -----------
A Multitude of Challenges in a Strained Business Climate
--------------------------------------------- -----------

11. (U) About 220 delegates, including CEOs, managing
directors and finance directors of major Zimbabwean companies
and financial institutions, attended the forum and a gala
closing cocktail reception hosted by ABAZ at the Ambassador's
residence. Unfortunately, the Forum occurred the morning
after an unscheduled Mid-Year Monetary Policy Statement by
Reserve Bank of Zimbabwe Governor Gono (Ref B), which
probably accounted for the especially high number of
pre-registered delegates ) 70 (for whom catering had been
ordered) ) who did not attend the forum. Apart from Deputy
Minister of Agriculture David Chapfika, no high-level GOZ
officials attended although ABAZ extended complimentary
invitations to two dozen GOZ ministers, deputies and
permanent secretaries.

12. (SBU) Despite strong financial sponsorship by major
companies and BFIF (Ref A), the Just Business forum closed
its books US$2,500 in the red. The loss was primarily due to
two factors: no-shows of pre-registered delegates (ABAZ has
not been able to collect the registration fee from these
registrants); and the sharp depreciation in value of
sponsorship money during planning. The Zimbabwe dollar
depreciated 78 percent on the parallel market from July 1 to
October 1, unbalancing the budget which included unavoidable
foreign currency denominated expenses.

--------------
Action Request
--------------

13. (SBU) Since last year's event, ABAZ has approved a
constitution, hired a professional secretariat and begun to
collect modest dues. However, the Association has not yet
built up reserves that enable it to meet a financial
shortfall. In support of the Association's role as a
catalyst in convincing the Zimbabwean business community to
pressure the GOZ for reform, and in light of the "Just
Business" track record under extremely taxing circumstances,
post requests US$2,500 from FY08 BFIF funds to pay the
outstanding balance.

----------
Next steps
----------

14. (SBU) ABAZ took a leap forward in establishing its
identity as a business organization at the forefront of
public discussion on economic reform. It also strengthened
the well-chosen "Just Business" brand and began to
institutionalize the "Just Business" private sector economic
forum as an annual business event in Zimbabwe. Delegates
commended the substance of the presentations and the superb
networking opportunity. Looking ahead, ABAZ plans to
circulate the forum proceedings widely to delegates,

HARARE 00001002 005 OF 005


interested parties and GOZ officials, and place excerpts of
the presentations in the press.

15. (SBU) Emboldened by positive feedback, ABAZ is also
reaching out to its members in the financial and mining
sectors to sponsor a series of workshops on South Africa's
experience with black economic empowerment. As long as
President Mugabe has not signed the Indigenization and
Economic Empowerment Bill (Ref D) into law and parliament has
not passed enabling legislation, ABAZ sees value in focusing
public attention on the more investor-friendly black
empowerment policies of South Africa as an indigenization
alternative. The Association is also riding the momentum of
a successful event by shoring up its numbers and its
financial strength in a new membership drive.

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

16. (SBU) As democratic space shrinks in Zimbabwe, we believe
that business organizations such as ABAZ and fora like "Just
Business" have a significant role to play in bringing
pro-reform pressure to bear on the GOZ and planting ideas
about the shape of the post-Mugabe future in Zimbabwe.
Clearly, the deteriorating economic and business climate made
it harder this year for an association that starts with "the
A word" to win the necessary sponsorship and pack a
conference hall. In the planning phase, during the worst
weeks of the price taskforce crackdown, it was also a
struggle for ABAZ to convince prominent international
speakers to travel to Zimbabwe to describe other troubled
economies, embrace of economic reform. But the young
business association, not intimidated, is tenaciously
developing its voice, forging ahead, growing its membership,
and leaving a footprint in reform minded circles. The
US$10,500 BFIF grant was money well spent and we hope that
EB/CBA will give our request for top-up funding to cover the
financial shortfall generous consideration.

DHANANI

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