US embassy cable - 04PRETORIA4252

UNCLAS SECTION 01 OF 04 PRETORIA 004252 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR OAISA/JEWELL 
 
E.O. 12958: N/A 
TAGS: EFIN, EAID, ETRD, OTRA, SF 
SUBJECT: Visit of Treasury Under Secretary for 
International Affairs John B. Taylor 
 
REF: Cape Town 536 (NOTAL) 
 
SENSITIVE BUT UNCLASSIFIED; PROTECT ACCORDINGLY. 
 
1.  (SBU)  Summary.  Treasury U/S Taylor and DAS 
Fratto sought support from South African Finance 
Minister Manuel to a U.S. proposal to move from loans 
to grants for HIPC countries in the multilateral 
development banks.  The Minister agreed that the HIPC 
program had lowered debt levels for participating 
countries but raised numerous questions about the 
proposal, including possible institutional affects 
and the long-term sustainability of donor flows to 
IDA and the AfDF.  U/S Taylor told Manuel that the 
U.S. could not support the IFF and that global taxes 
for development were politically unacceptable.  In a 
separate meeting, U/S Taylor and Reserve Bank 
Governor Mboweni discussed an IMF staff proposal to 
provide technical assistance to HIPC countries 
without requiring that a Fund program be in place. 
 
2.  (U)  In Cape Town, U/S Taylor and DAS Fratto met 
with South African apparel and wine exporters 
benefiting from AGOA, and in Johannesburg, the 
Treasury officials visited a former township to see a 
range of low-income housing initiatives, including 
those benefiting from the USG/s African Mortgage 
Markets Initiative.  Public diplomacy aspects of U/S 
Taylor's visit are reported in reftel.  End Summary. 
 
U.S. Proposal for IDA Grants 
---------------------------- 
 
3.  (SBU)  In a September 8 Cape Town dinner meeting, 
Treasury Under Secretary for International Affairs 
John Taylor and DAS Tony Fratto discussed with 
Finance Minister Trevor Manuel and senior National 
Treasury officials a U.S. proposal to move from loans 
to grants for HIPC countries in the multilateral 
development banks (MDBs).  U/S Taylor explained that 
the HIPC initiative had not succeeded in reducing the 
debt burden.  HIPC countries found themselves in an 
absurd situation.  They must borrow to repay debt. 
U/S Taylor said the donor community needed to find a 
way to stand down on debt while keeping resources 
flowing for developing countries.  If donors did not 
find a way to stop the build up of debt, MDB resource 
flows would be wasted. 
 
4.  (SBU)  Finance Minister Manuel said he agreed 
with the diagnosis, but he was not sure of the 
treatment.  He was worried about the unintended 
consequences of the idea.  He said the proposal to 
shift to grants could imply fundamental change in the 
World Bank as an institution.  For the Minister, the 
AfDB/F was the key question.  Changing the funding 
structure might destroy the institution.  AfDB/F 
issue needs a separate look in his view.  The 
Minister also expressed concern about the long-term 
sustainability of donor flows.  He stated that the 
IDA pool of funds is currently not large enough to 
meet Millennium Development Goals.  He asked what is 
the security of income to IDA?  Will the U.S. 
Congress continue to support resources for IDA? 
 
5.  (SBU)  U/S Taylor explained that the U.S. idea 
did not represent institutional change.  IBRD loans 
would not be affected.  The focus was strictly HIPC. 
Taylor agreed that sustaining flows was the key 
question and explained that the U.S. proposal would 
not reduce resources.  In fact, IDA and other soft 
loan institutions, such as the AfDF, would actually 
get more funds.  Taylor pointed out that IDA would 
always depend on donor funding.  It will never be 
self-sustaining.  He added that there was also a 
moral question of using reflows from countries like 
Ethiopia to pay for development in Niger.  U/S Taylor 
said he had a higher degree of confidence in donor 
countries funding IDA than developing countries 
repaying IDA loans.  In fact, IDA 14 contributions 
would be higher.  U/S Taylor said he was optimistic 
that the U.S. Congress would support grant funding, 
 
6.  (SBU)  Ambassador Frazer added that HIPC simply 
was not working.  We needed to change our approach to 
get HIPC countries to a sustainable level of 
development.  The Ambassador said the international 
community had a window of opportunity to move ahead; 
we should not let the perfect be the enemy of the 
good.  She emphasized that there is no political gain 
for U.S. in its proposal. 
 
7.  (SBU)  Manuel noted that there are two other 
proposals on the table that would increase ODA to 
developing countries: the International Financing 
Facility (IFF) and some form of a global tax.  While 
acknowledging that the U.S. had problems with the 
IFF, the minister said the international community 
needed to understand and explore the issues with the 
IFF and global taxation proposals.  He noted that the 
U.S. proposal to move to grants in the MDB's and the 
other initiatives should not be seen as mutually 
exclusive. 
 
8.  (SBU)  U/S Taylor replied that the IFF was fine 
if the Europeans wanted to pursue it, but the U.S. 
simply could not do it based on our own laws.  The 
international tax was a non-starter: it would not fly 
domestically in the U.S. 
 
9.  (SBU)  U/S Taylor said he believed the U.S. idea 
would be popular with African countries, as they 
would benefit most.  He said the U.S. would like 
South African and international support and asked for 
Manuel's advice on how to approach others to discuss 
the proposal.  The Minister suggested that the U.S. 
would need to address the systemic issues for the 
IBRD and regional institutions; answer questions of 
resource adequacy and flexibility; include ideas on 
the re-financing of existing loans; and think through 
the long term effects to create buy-in.  Manuel also 
opined that the proposal was too easy for donor 
countries.  The real need was for more multilateral 
funds. 
 
FTA Negotiations 
---------------- 
 
10.  (SBU)  U/S Taylor also discussed briefly with 
Minister Manuel, a former trade minister, the U.S.- 
SACU FTA negotiations.  He noted that an FTA was the 
logical next step to build on the success of AGOA. 
He hoped the U.S. and SACU would move expeditiously 
to conclude the agreement by the end of the year. 
Manuel noted that he was "a bit of a purist" on trade 
issues, favoring an emphasis on multilateral 
negotiations.  The Under Secretary commented that the 
U.S. was determined to move ahead on all trade 
fronts: multilateral, regional and bilateral. 
 
AGOA Helps the Apparel Industry 
------------------------------- 
 
11.  (U)  Following a September 9 breakfast briefing 
with South African journalists (reftel), U/S Taylor 
and DAS Fratto visited the House of Monatic, a 
clothing manufacturer producing for the South African 
and international market.  Among those participating 
in the boardroom session were Fred Robertson, chief 
executive officer for Brimstone Investment Holdings, 
a Black Economic Empowerment company that owns House 
of Monatic; Brian Buckingham, manager for Monatic; 
and Jack Kipling, executive officer of the Clothing 
Export Council.  House of Monatic employs over 1,000 
workers and produces on the export side for 
Nordstrom, J.C. Penny, Dillards, and others in the 
U.S. 
 
12.  (U)  Jack Kipling reported that AGOA was 
responsible for the creation of 12,000 new jobs in 
South Africa.  He argued that it has been largely 
South African factors that have inhibited greater 
growth, including the high rand and the inability of 
local textile producers to provide sufficient fabric 
in a timely manner.  Wage differentials are also 
hurting South African competitiveness with an average 
of about USD 2.05 paid per hour in Cape Town, placing 
it on par with Turkey.  The South Africans, Kipling 
reported, were feeling especially keen competition 
from Madagascar and Mozambique, where labor cost per 
hour were well below 75 US cents per hour.  Other 
factors cited by participants as responsible for 
dampening growth were the absence of direct U.S. 
foreign investment in clothing and a lack of interest 
in South African production on the part of U.S. 
textile suppliers.  Robertson noted the importance of 
the clothing industry in job creation.  He reported 
on Brimstone's recent acquisition of a jean 
production plant, formerly owned by a Chinese company 
in Atlantis, a depressed community north of Cape 
Town, as a means of creating new jobs. 
 
13.  (U)  On the negotiations for the FTA with SACU, 
Jack Kipling laid out the industry's position saying 
it fully supports an FTA, seeks to build a vibrant, 
sustainable clothing industry with as many as 500,000 
jobs, and wants a regime that will allow greater 
South African access to third country fibers, even if 
it was only for a specified transition period of 
perhaps 15 years.  Without substantial growth, 
Kipling feared the South African clothing industry 
would wither.  A tour of House of Monatic operations 
followed the boardroom session. 
 
Wine Exports, Too 
----------------- 
 
14.  (U)  In conjunction with the Wines of South 
Africa, (South Africa's wine industry export 
council), Charles Back, owner of Fairview Estates in 
Paarl, hosted a small lunch for the U/S Taylor and 
DAS Fratto.  Owner of a third generation-farm, Back 
has employed clever marketing strategies and catchy 
titles to attract attention in the U.S. and Europe. 
His Goats do Roam blend of red wine have made 
considerable headway in the U.S., reportedly selling 
over 1.2 million bottles in 2003.  Back attributed 
his success to his ability to establish good and 
often personal working relations with American 
importers.  Overall, individual makers like Back and 
marketing strategists at WOSA aim at cutting into the 
share of the market they believe overly dominated by 
Australia with good products at the lower end of the 
price spectrum. 
 
Economy Finally Creating Jobs 
----------------------------- 
 
15.  (SBU)  At the Governor's request, U/S Taylor and 
DAS Fratto met over breakfast September 10 in 
Pretoria with South African Reserve Bank Governor 
Tito Mboweni.  Gov. Mboweni noted that, although the 
numbers were small, the South African economy was 
finally beginning to create jobs, particularly in the 
mining, manufacturing and construction sectors.  He 
expressed concern about the continued growth of the 
services sector as a percentage of GDP.  This sector 
would not absorb many of South Africa's poorly 
skilled unemployed.  The Governor concurred with U/S 
Taylor's comment on the value of AGOA to Africa; 
however, he suggested that the U.S. try to do more to 
reduce non-tariff barriers.  Econ M/C pointed out 
that the U.S. was already helping in this area, for 
example through USDA's APHIS, which worked closely 
with SA exporters.  Mboweni felt that South Africa 
would see the benefits of more open trade over the 
coming 4-5 years with improved productivity. 
 
Assisting African Central Banks 
------------------------------- 
 
16.  (SBU)  U/S Taylor raised with Governor Mboweni a 
recent IMF staff proposal to provide technical 
assistance to HIPC countries without requiring that a 
Fund program be in place.  U/S Taylor pointed out the 
program would be strictly voluntary.  He noted that 
initial reaction from HIPC countries was positive and 
that some emerging market economies were also 
interested. 
 
17.  (SBU)  Mboweni noted that many African countries 
want this type of assistance but are reluctant to 
call on the IMF due to its reputation: they prefer 
bilateral programs.  He stated that South Africa had 
central bank technical assistance programs with all 
13 other SADC members, plus Rwanda, Gambia and other 
African countries.  He said that fortunately he had 
recently retired Reserve Bank staff that could 
provide the assistance but that it was "costing me 
money."  He noted that he recently told Egyptian 
officials that the first thing to do was give the 
central bank independence.  He noted that this was a 
hard message for many African governments to accept. 
 
Housing Finance 
--------------- 
 
18.  (U)  Prior to departure, U/S Taylor and DAS 
Fratto toured Alexandra, a former township adjoining 
Johannesburg's Sandton suburb.  U/S Taylor saw a 
range of low-income urban housing, from squatter 
camps to government-provided single rooms houses to 
modest single-family homes typical of houses that 
will be insured through USAID-guaranteed mortgage 
insurance programs, in conjunction with South 
Africa's Home Loan Guarantee Company.  U/S Taylor 
also received a briefing on innovative OPIC-supported 
program that will support HIV/AIDs treatment for 
those who purchase the insurance product, enabling 
them to continue working and earning an income, 
maximizing their ability to provide support to their 
families.  U/S Taylor noted the benefits of both 
programs, part of the USG's African Mortgage Markets 
Initiative. 
 
19.  (U)  DAS Fratto cleared this message.  Frazer