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. 
 
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Comment 
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¶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