US embassy cable - 03HARARE1762

UNCLAS HARARE 001762 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
USDOC FOR 2037 DIEMOND 
TREASURY FOR OREN WYCHE-SHAW 
PASS USTR FLORIZELLE LISER 
STATE PASS USAID FOR MARJORIE COPSON 
 
E. O. 12958: N/A 
TAGS: ECON, EINV, PGOV, ZI 
SUBJECT: Zimbabwe Economic Policy: Is Rigor Mortis 
Setting In? 
 
1. (SBU) Summary: As with directionless negotiations 
about negotiations in the political sphere, the GOZ keeps 
boasting of meaningful economic reform that it never gets 
around to.  Long-promised initiatives - more banknotes, 
devaluation, better land reform, the return of fuel and 
less public spending - go nowhere.  End Summary. 
 
2. (SBU) We update these key areas below: 
 
- Banknote shortage.  The GOZ continues to insist it will 
print and circulate new Z$1,000 and 500 notes in October. 
However, monthly inflation is 33 percent and rising.  If 
the GOZ sticks to these measly denominations - worth only 
cents on the U.S. dollar - we see no prospect it can keep 
pace with inflation, let along get ahead of it.  Instead 
the GOZ has been backtracking in recent weeks, claiming 
it will withdraw existing Z$500 notes from circulation 
(90 percent of existing money's value) or prohibit 
organizations from cash withdrawals. 
 
- Overvalued currency.  The GOZ requires exporters to 
exchange 50 percent of earnings at Z$824:US$1, an 
enormous indirect tax.  After devaluing for export 
transactions from Z$55 to 824:US$1 in February, the GOZ 
committed itself to quarterly reviews of the exchange 
rate.  None has taken place, even though the parallel 
market rate has slipped from about Z$1500 to 5600:US$1. 
 
- Rationalizing land reform.  Zimbabwe's agricultural 
sector, once so robust that this little country became 
the world's top tobacco exporter, is in shambles.  Most 
damage has been caused by the GOZ's mangled land reform. 
The present model is untenable (beneficiaries never get 
title-deed) and insiders have literally handpicked 
multiple farms for themselves.   President Mugabe has 
appointed a commission to investigate abuses and make 
recommendations, but the commission's long-anticipated 
report has been repeatedly delayed.  Meanwhile, the GOZ 
continues to seize new farms, particularly those of agro- 
businesses. 
 
- Fuel shortage.  Zimbabwe's gas stations have been dry 
for almost 5 months.  The GOZ recently boosted the fuel 
price from Z$450 to 1,170/liter, but the market price is 
around Z$1,700.  A supernatural force seems to prevent 
the GOZ from approving a price higher than two-thirds of 
the international market price; still, the GOZ has raised 
the fuel price 17-fold this year. (It upped the price to 
Z$450 in February when the market cost was Z$650.)  In 
the end, this accomplishes nothing.  BP, ChevronTexaco 
and ExxonMobil have little interest in selling at a loss, 
even a reduced one. 
 
- Near-hyperinflation.  The GOZ continues to overspend, 
mostly by holding interest rates artificially low (324 
percent negative) for its own borrowing purposes. 
Without allowing interest rates to rise, we see no way it 
can take control of inflation.  Again, we see 
backtracking:  Pro-GOZ economists argue in the official 
press for lower interest rates to spur growth, a policy 
that is already failing. 
 
3. (SBU) Comment: We are skeptical President Mugabe will 
make the tough choices to get the economy moving again. 
He would have to acknowledge that his currency is worth 
only Z$5600:US$1, that land reform has crippled most of 
the agricultural sector, that the GOZ chronically 
overspends.  So far, Mugabe's most ambitious economic 
initiative has been quarterly trips to Libya to beg for 
free fuel.  (If the Republic of South Africa were not 
supplying free electricity, it is likely the GOZ would 
have yet another major crisis to contend with.) 
Meanwhile, we continue to marvel at the GOZ's tenacity in 
imposing economic sanctions upon itself, all far more 
de