US embassy cable - 01HARARE926

ZIMBABWE'S RECENT ECONOMIC RESULTS AND OUTLOOK

Identifier: 01HARARE926
Wikileaks: View 01HARARE926 at Wikileaks.org
Origin: Embassy Harare
Created: 2001-03-06 13:18:00
Classification: CONFIDENTIAL
Tags: ECON EFIN ETRD ZI
Redacted: This cable was not redacted by Wikileaks.
This record is a partial extract of the original cable. The full text of the original cable is not available.

061318Z Mar 01


                           CONFIDENTIAL     PTQ5189

PAGE 01        HARARE  00926  01 OF 03  061320Z 
ACTION AF-00    

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                  ------------------CE3059  061320Z /38    
FM AMEMBASSY HARARE
TO SECSTATE WASHDC 8361
INFO SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
USDOC WASHDC
NSC WASHDC
DEPTTREAS WASHDC
C O N F I D E N T I A L SECTION 01 OF 03 HARARE 000926 
 
SIPDIS 
 
STATE FOR AF, AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC 
TREASURY FOR ED BARBER AND BARAK HOFFMAN 
USDOC FOR 2037/ERIC HENDERSON 
STATE PASS USTR/RWHITTAKER 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
PARIS FOR BISA WILLIAMS 
LONDON FOR CGURNEY 
 
E.O. 12958: DECL: 03/06/06 
TAGS: ECON, EFIN, ETRD, ZI 
SUBJECT: ZIMBABWE'S RECENT ECONOMIC RESULTS AND OUTLOOK 
 
 
CLASSIFIED BY ECON/COMM OFFICER MARK PROKOP, REASONS 
1.5 (B), (D). 
 
1.  (C) SUMMARY: THIS REPORT PROVIDES KEY ECONOMIC DATA 
ENABLING READERSHIP TO STAY ABREAST OF ZIMBABWE'S FALLING 
ECONOMIC PERFORMANCE.  TWO MONTHS INTO THE NEW YEAR A 
BETTER PICTURE OF LAST YEAR'S POOR PERFORMANCE IS 
EMERGING, AS WELL AS TRENDS THAT DO NOT BODE WELL FOR 
2001.  IN BRIEF THE RESULTS ARE: 
 
= REAL GDP DECLINED IN 2000, ABOUT 5 PERCENT BY GOZ 
ESTIMATES, AND AT LEAST 7-8 PERCENT ACCORDING TO US AND 
LOCAL ECONOMISTS; 
= INFLATION, AT 56 PERCENT IN 2000, IS EXPECTED TO STAY 
STRONG, AND COULD VERY WELL INCREASE IF A TURNAROUND IS 
NOT SOON ENGINEERED; 
= TRADE FLOWS WILL CONTINUE TO BE NEGATIVE AND THE 
BALANCE-OF-PAYMENTS SITUATION WILL WORSEN, AS ARREARS 
MOUNT AND DEVELOPMENT AID AND MULTILATERAL LENDING REMAIN 
SHUTOFF; 
= ARREARS (COMBINED PUBLIC AND PRIVATE SECTORS) WILL 
EASILY EXCEED U.S. $1 BILLION EQUIVALENT BEFORE MID-YEAR; 
= GOVERNMENT DEBT WILL CONTINUE TO SOAR, DRIVEN BY 
DEFICIT SPENDING AND VERY HIGH INTEREST COSTS; 
= ANY TURNAROUND MUST ADDRESS THE CURRENT DEBT TRAP, 
REQUIRE STRICT BUDGET ADHERENCE, ARREST THE RUNAWAY MONEY 
SUPPLY GROWTH, ENSURE RATIONAL DEVALUATION, SEE THE 
RESTORATION OF LAW AND ORDER, AND A PULLOUT FROM THE 
CONGO.  END SUMMARY 
                       CONFIDENTIAL 
 
PAGE 03        HARARE  00926  01 OF 03  061320Z 
 
------------- 
DECLINING GDP 
------------- 
 
2.  (U) IN HIS NOVEMBER 2000 BUDGET SPEECH, THE FINANCE 
MINISTER REVEALED THAT HIS MINISTRY EXPECTED A 4.2 DROP 
IN REAL GDP FOR 2000, A DECLINE MUCH WORSE THAN THE 
GOVERNMENT'S MID-YEAR ESTIMATE OF 1.3 PERCENT.  THE 
MINISTRY HAS SINCE BUMPED ITS PROJECTION TO 4.8 PERCENT, 
A FIGURE THAT SIGNIFIES A SERIOUS FALL.  MANY LOCAL 
ECONOMISTS CONSIDER THIS TOO LOW, AND ESTIMATE THAT 
ZIMBABWE'S ECONOMY SHRUNK BY AT LEAST 7 TO 8 PERCENT 
BASED ON DATA SHOWING THAT MANUFACTURING AND MINING 
RESPECTIVELY DECLINED 10.5 AND 14 PERCENT, WITH 
CONSTRUCTION AND TOURISM OFF BY AT LEAST 60 PERCENT.  THE 
FUEL SHORTAGES EXPERIENCED THROUGHOUT 2000 HAVE ALSO 
SQUEEZED ECONOMIC ACTIVITY IN ALL SECTORS. 
 
3.  (C) OF POTENTIALLY GREATER CONCERN IS THAT THE CAUSES 
BEHIND LAST YEAR'S POOR RESULTS HAVE NOT ABATED AND IN 
AGRICULTURE, THE COUNTRY'S BIGGEST ECONOMIC SEGMENT, HAVE 
ACTUALLY GOTTEN WORSE.  THE GOVERNMENT'S ACTIONS DRIVEN 
BY ITS POLITICAL AGENDA HAVE INCREASED ITS INTERNATIONAL 
ISOLATION; WITH ASSISTANCE BEING CUT OR SUSPENDED WHILE 
AT THE SAME TIME PORTFOLIO AND DIRECT FOREIGN INVESTMENT 
HAVE VIRTUALLY DRIED UP, AS MOST OVERSEAS COMMERCIAL 
BANKS HAVE SHUT DOWN OR WITHDRAWN LINES OF CREDIT. 
 
4.  (C) ANNUAL INFLATION, WHICH AVERAGED 58.5 PERCENT IN 
1999, DECREASED TO 55.9 PERCENT IN 2000 ACCORDING TO 
                       CONFIDENTIAL 
 
PAGE 04        HARARE  00926  01 OF 03  061320Z 
GOVERNMENT STATISTICS.  LOCAL BUSINESSES, BASED ON THEIR 
PAYMENT STREAMS, PEG LAST YEAR'S REAL, OVERALL INFLATION 
RATE AT 80 - 85 PERCENT, A FIGURE WE AGREE WITH.  THE 
PRESSURES BEHIND THE PRICE INCREASES REMAIN HIGH, DRIVEN 
BY EXCESSIVE MONEY SUPPLY GROWTH (THE BROAD MONEY GROWTH 
RATE INCREASED FROM UNDER 30 PERCENT IN DECEMBER 1999 TO 
61.2 PERCENT IN OCTOBER 2000), CONTINUED HIGH BORROWING 
NEEDS OF THE GOVERNMENT, AND THE INCREASING SPREAD 
BETWEEN THE OFFICIAL AND "PARALLEL" FOREIGN EXCHANGE 
RATES (55:1 V.S. 80-90:1). 
 
--------------------------------------- 
TRADE FLOWS AND THE BALANCE OF PAYMENTS 
--------------------------------------- 
 
5.  (C) EXPORTS ARE ESTIMATED TO HAVE FALLEN BY 5.4 
PERCENT IN 2000, LEADING TO A CURRENT ACCOUNT DEFICIT OF 
U.S. $210 MILLION, DESPITE AN ESTIMATED 9.3 PERCENT 
DECLINE IN IMPORTS (THE LATTER CAUSED BY THE HARD 
CURRENCY SHORTAGE AND DECLINING GDP).  THIS IS A SHARP 
DETERIORATION FROM THE 1999 CURRENT ACCOUNT SURPLUS OF 
U.S. $29 MILLION.  WITH NO INVESTMENT FLOW AND REDUCED 
DEVELOPMENT ASSISTANCE, THE OFFICIAL CAPITAL ACCOUNT IS 
ESTIMATED TO HAVE REGISTERED A DEFICIT OF U.S. $401 
 
                       CONFIDENTIAL 
 
                           CONFIDENTIAL     PTQ5190 
 
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ACTION AF-00 
 
INFO  LOG-00   AID-00   CEA-01   CIAE-00  CTME-00  DODE-00  DOTE-00 
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      AC-01    NSAE-00  OES-01   OMB-01   OPIC-01  ACE-00   SP-00 
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                  ------------------CE3065  061320Z /38 
R 061318Z MAR 01 
FM AMEMBASSY HARARE 
TO SECSTATE WASHDC 8362 
INFO SOUTHERN AFRICAN DEVELOPMENT COMMUNITY 
USDOC WASHDC 
NSC WASHDC 
DEPTTREAS WASHDC 
 
C O N F I D E N T I A L SECTION 02 OF 03 HARARE 000926 
 
SIPDIS 
 
STATE FOR AF, AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC 
TREASURY FOR ED BARBER AND BARAK HOFFMAN 
USDOC FOR 2037/ERIC HENDERSON 
STATE PASS USTR/RWHITTAKER 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
PARIS FOR BISA WILLIAMS 
LONDON FOR CGURNEY 
 
E.O. 12958: DECL: 03/06/06 
TAGS: ECON, EFIN, ETRD, ZI 
                       CONFIDENTIAL 
 
PAGE 02        HARARE  00926  02 OF 03  061320Z 
SUBJECT: ZIMBABWE'S RECENT ECONOMIC RESULTS AND OUTLOOK 
 
MILLION, RESULTING IN A NEGATIVE BALANCE OF PAYMENTS 
POSITION OF U.S. $611 MILLION IN 2000. 
 
6.  (C) GIVEN THIS VERY POOR FUNDS-FLOW BACKDROP, IT 
SHOULD BE NO SURPRISE THAT ZIMBABWE IS FINDING IT 
INCREASINGLY DIFFICULT TO MEET ITS FOREIGN PAYMENT 
OBLIGATIONS, FOR BOTH CURRENT EXPENDITURES (SUCH AS FUEL) 
AND DEBT REPAYMENT.  FOREIGN ARREARS, WHICH STOOD AT U.S. 
$109 MILLION AT YEAR-END 1999, SOARED TO WELL OVER $600 
MILLION AT YEAR-END 2000.  WE ESTIMATE A CURRENT ACCOUNT 
DEFICIT OF AT LEAST $300 MILLION FOR THIS YEAR (THOUGH 
THIS COULD MORE THAN DOUBLE IF AGRICULTURAL RESULTS ARE 
POOR), WHICH WHEN ADDED TO INCREASING PAYMENT ARREARS 
MEANS A TOTAL FINANCING REQUIREMENT IN 2001 OF AT LEAST 
U.S. $1.1 BILLION (IF ZIMBABWE IS NOT GOING TO BACKSLIDE 
FURTHER).  THE PROSPECTS OF ADDRESSING THIS GAP ARE 
DAUNTING TO SAY THE LEAST, AND EVEN THE FULL RE- 
ENGAGEMENT AND WHOLEHEARTED PROGRAM SUPPORT OF ALL DONORS 
AND INTERNATIONAL LENDERS WOULD LIKELY BE INSUFFICIENT. 
 
------------------------------ 
THE GOVERNMENT'S DOMESTIC DEBT 
------------------------------ 
 
7.  (C) A DEFICIT OF Z $10.8 BILLION (4.8 PERCENT OF GDP) 
WAS PROJECTED IN THE 2000 GOZ BUDGET. HOWEVER, BY YEAR- 
END THIS HAD INCREASED TO Z $ 55.2 BILLION (ABOUT 24 
PERCENT OF GDP), WHICH AMOUNT WAS TOTALLY FINANCED BY 
DOMESTIC BORROWING.  THE CURRENT PUBLIC SECTOR DEBT 
                       CONFIDENTIAL 
 
PAGE 03        HARARE  00926  02 OF 03  061320Z 
EXCEEDS Z $160 BILLION, HAVING MORE THAN DOUBLED FROM $80 
BILLION AT THE BEGINNING OF THE YEAR.  SHORT-TERM 
TREASURY BILLS MAKE UP THE VAST BULK OF THIS DEBT, AND 
WITH THE AVERAGE INTEREST RATE WELL EXCEEDING 55 PERCENT 
LAST YEAR, THE INTEREST BILL ALONE MAKES UP NEARLY HALF 
OF GOVERNMENT OUTLAYS.  THE RUNAWAY GROWTH OF INTEREST 
COSTS, AS DEBT BALLOONS, CAUSED THE GOVERNMENT TO BORROW 
OVER 42 PERCENT OF ITS BUDGET IN 2000 FROM THE DOMESTIC 
SAVINGS POOL.  IN SHORT IT BORROWED MONEY AT NEAR- 
USURIOUS INTEREST RATES TO PAY THE INTEREST ON MONEY IT 
HAD PREVIOUSLY BORROWED. 
 
----------------------------- 
MOVES TO RESTRUCTURE THE DEBT 
----------------------------- 
 
8.  (C) TO CUSHION THE NEGATIVE EFFECTS OF THIS 
DEBT/BORROWING CYCLE, THE FINANCE MINSTER PROMISED IN THE 
2001 BUDGET THAT HE WOULD RESTRUCTURE THE GOZ DOMESTIC 
DEBT; REDUCING THE SHORT TERM (I.E., T-BILL) PORTION FROM 
ABOUT 96 PERCENT DOWN TO 70 PERCENT IN AN ATTEMPT TO 
LOWER THE GOVERNMENT'S TOTAL INTEREST BILL.  (THE GOZ'S 
LONG-TERM DEBT STOCK, Z$8 BILLION OUT OF Z$162 BILLION, 
WAS ISSUED IN THE LATE 1980'S AND EARLY 1990'S AT RATES 
BETWEEN 9 AND 24 PERCENT.)  TO ACHIEVE THIS END, THE 
FINANCE MINISTRY AT THE END OF JANUARY EMBARKED ON AN 
EFFORT TO DRIVE DOWN MONEY MARKET RATES BY 1) NOT ROLLING 
OVER MATURING T-BILLS, AND 2) RELEASING THE CENTRAL 
BANK'S STATUTORY RESERVES ONTO THE MARKET VIA A 15 
PERCENT FACILITY TARGETED AT EXPORTERS.  THE RESULTANT 
FLOOD OF LIQUIDITY CAUSED A DRASTIC, AND ENGINEERED, 
                       CONFIDENTIAL 
 
PAGE 04        HARARE  00926  02 OF 03  061320Z 
RECENT DIP IN RATES TO THE MID-TEENS, A RATE FAR BELOW 
INFLATION. 
 
9.  (C) INTO THIS NEGATIVE INTEREST RATE ENVIRONMENT, THE 
MINISTRY ANNOUNCED IN MID-FEBRUARY THE FLOTATION OF A Z 
$25 BILLION, FIVE-YEAR TREASURY BOND WITH A FIXED 25 
PERCENT INTEREST COUPON.  (ABOUT U.S. $450 MILLION AT 
OFFICIAL RATES AND EQUIVALENT TO ABOUT 15 PERCENT OF 
CURRENT, TOTAL GOZ DEBT.)  TO ENSURE ITS SALE, THE 
CENTRAL BANK SIMULTANEOUSLY ANNOUNCED THAT IT WAS TO 
BEGIN ENFORCING A PROSCRIBED ASSETS RULE, DICTATING THAT 
A MINIMUM PORTION OF THE HOLDINGS OF FINANCIAL 
INSTITUTIONS, PENSION FUNDS AND INSURERS MUST BE HELD IN 
VARIOUS MATURITIES OF GOVERNMENT PAPER.  CAUGHT IN THIS 
SQUEEZE THE HOLDERS OF CASH HAVE HAD TO BELLY UP (IN ALL 
CASES AGAINST THEIR WISHES AND FIDUCIARY PRINCIPLES) AND 
THE ISSUE, WHICH CLOSED MARCH 5, IS EXPECTED TO SELLOUT. 
THE FINANCE MINISTRY'S MUSCLING IN ON THE FINANCIAL 
MARKETS EFFECTIVELY STEALS PRESENT SAVINGS THROUGH ITS 
SHARPLY NEGATIVE INTEREST RATES, UNLESS INFLATION FALLS 
DRASTICALLY IN THE NEAR TERM, A DEVELOPMENT NO ONE 
FORESEES OCCURRING.  WIDOWS AND PENSIONERS ARE THE WORST 
AFFECTED.  NEAT FINANCIAL ENGINEERING, BUT NOT SOUND, OR 
SUSTAINABLE, FINANCIAL POLICY. 
 
                       CONFIDENTIAL 
 
                           CONFIDENTIAL     PTQ5191 
 
PAGE 01        HARARE  00926  03 OF 03  061320Z 
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      FRB-00   H-01     TEDE-00  INR-00   ITC-01   L-00     VCE-00 
      AC-01    NSAE-00  OES-01   OMB-01   OPIC-01  ACE-00   SP-00 
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                  ------------------CE3069  061320Z /38 
R 061318Z MAR 01 
FM AMEMBASSY HARARE 
TO SECSTATE WASHDC 8363 
INFO SOUTHERN AFRICAN DEVELOPMENT COMMUNITY 
USDOC WASHDC 
NSC WASHDC 
DEPTTREAS WASHDC 
 
C O N F I D E N T I A L SECTION 03 OF 03 HARARE 000926 
 
SIPDIS 
 
STATE FOR AF, AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC 
TREASURY FOR ED BARBER AND BARAK HOFFMAN 
USDOC FOR 2037/ERIC HENDERSON 
STATE PASS USTR/RWHITTAKER 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
PARIS FOR BISA WILLIAMS 
LONDON FOR CGURNEY 
 
E.O. 12958: DECL: 03/06/06 
TAGS: ECON, EFIN, ETRD, ZI 
                       CONFIDENTIAL 
 
PAGE 02        HARARE  00926  03 OF 03  061320Z 
SUBJECT: ZIMBABWE'S RECENT ECONOMIC RESULTS AND OUTLOOK 
 
---------------- 
ECONOMIC OUTLOOK 
---------------- 
 
10.  (C) DESPITE THE INTEREST SAVINGS GAINED IN THE SMOKE 
AND MIRRORS TRICK DESCRIBED ABOVE, ANY ECONOMIC RECOVERY 
IN 2001 WILL DEPEND LARGELY ON THE FOLLOWING KEY FACTORS: 
 
=  RESOLUTION OF THE CURRENT PUBLIC SECTOR DOMESTIC DEBT 
TRAP; 
 
= GOVERNMENT'S ABILITY TO STAY WITHIN THE FRAMEWORK OF 
THE ANNOUNCED BUDGET (THE 2001 BUDGET PROJECTS A GOZ 
DEFICIT OF 14.6 PERCENT OF GDP); 
 
= CONTAINMENT OF MONEY SUPPLY GROWTH RATES TO LEVELS 
CONSISTENT WITH REAL ECONOMIC ACTIVITY; 
 
= DEVALUATION CONSISTENT WITH DOMESTIC INFLATION RATES; 
 
= RESTORATION OF ORDERLINESS, AND LAW AND ORDER, IN THE 
LAND REDISTRIBUTION EXERCISE, AND; 
 
= AN END TO THE MILITARY DEPLOYMENT IN THE CONGO. 
 
11.  (C) THE REALIZATION OF THESE KEY PARAMETERS WOULD 
DAMPEN INFLATIONARY PRESSURES SIGNIFICANTLY AND PROPEL 
THE ECONOMY FROM A POTENTIAL SLUMP IN REAL GDP OF OVER 10 
                       CONFIDENTIAL 
 
PAGE 03        HARARE  00926  03 OF 03  061320Z 
PERCENT IN 2001 TO MODEST RECOVERIES IN SOME SECTORS, 
SUCH AS MANUFACTURING AND MINING.  THE CURRENT POLITICAL 
ENVIRONMENT AND ITS MOMENTUM AND DIRECTION, HOWEVER, DOES 
NOT MAKE US SANGUINE THAT A RETURN TO SANE ECONOMIC 
POLICIES AND DECISIONS IS IN THE OFFING.  SADLY MORE OF 
THE SAME APPEARS IN STORE, AT LEAST UNTIL THE 
PRESIDENTIAL ELECTIONS ARE OVER, AND BY THEN THE DAMAGE 
TO ZIMBABWE'S FUTURE MAY BE MUCH GREATER THAN THAT SEEN 
TO DATE. 
 
IRVING 
 
                       CONFIDENTIAL 
 
> 

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