US embassy cable - 03HARARE2284

UNCLAS HARARE 002284 
 
SIPDIS 
 
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, EFIN, EINV, PGOV, ZI 
SUBJECT: 2004 budget was nonevent 
 
 
1. Summary: Consider two dissonant facets of last 
Thursday's budget announcement- 
 
a) The Robert Mugabe government projected this year's 
economic growth at minus-13.2 percent, ensuring Zimbabwe 
remains the planet's worst performing peacetime economy. 
 
b) It proposed no significant new initiatives or policy 
changes. 
 
The budget, descriptive rather than prescriptive, wears 
the insignia of entrenched bureaucratic paralysis. 
Neither moderates nor hardliners were able to impose 
their will on the process.  The heat of battle has proven 
more than Herbert Murerwa, Zimbabwe's timid finance 
minister, could bear.  He gleefully ceded policymaking 
authority to incoming Reserve Bank Governor Gideon Gono, 
the economy's new point man.  End Summary. 
 
Issues Skirted 
-------------- 
2.  Most of the speech is too mundane to cite (even in an 
economic reporting cable).  The GOZ mostly adjusted 
revenue for inflation, raising the tax brackets and most 
smaller taxes about 10-fold, as well as converting a 
sales to value-added tax.  It might be more instructive 
to look instead at the main issues the budget skirted: 
 
- Devaluation.  A low official currency rate, coupled 
with mandatory exchange requirements, has crippled 
Zimbabwe's export sector.  Moderates pressed 
unsuccessfully for devaluation, or a reduction from 50 
percent of earnings in the exchange requirement.  The 
budget did not mention devaluation and, worse still, 
suggested the GOZ may introduce exchange controls in 
export processing zones, a remaining bastion of 
commercial vitality. 
 
- Parallel Market Trading.  Hardliners sought a more 
aggressive clampdown on parallel market trading; 
moderates wanted official approval for these 
transactions.  Official policy is contradictory.  For 
instance, the GOZ has agreed that oil companies can sell 
fuel at an international market price, but may not 
replenish stocks by converting earnings into forex.  The 
budget also insisted that energy, telecom, grain and 
transport parastatals should charge "break-even prices" 
for goods and services, but the only means for cost- 
recovery would be parallel market pricing.   Although the 
budget was otherwise silent on parallel market trading, 
last Friday's Herald - a hardliner mouthpiece - kept the 
pressure up by arguing "when a nation starts pricing its 
products and services on parallel market rates, that in 
itself is a signal for disaster." 
 
- Land Reform.  Hardliners wanted the GOZ to spend 
heavily on resettled farms.  The budget allocated only 
Z$25 billion (US$4 million) toward inputs for small-scale 
farmers, triggering a sharp denunciation from the same 
Herald editorial. 
 
- Interest Rates.  Probably no other GOZ policy is more 
responsible for runaway inflation than artificially low 
lending rates, currently 400-percent negative. 
Hardliners are adamant about keeping them down as a means 
to spur productivity.  Moderates argue that negative 
rates have caused capital flight, speculative borrowing 
and, most importantly, GOZ overspending. 
 
Comment 
------- 
3. The milk-toast budget suggests the Finance Ministry is 
no longer a player in GOZ economic policymaking, quite a 
tumble for a ministry once commandeered by forceful 
figures like Bernard Chidzero and Simba Makoni. 
Regardless of official title, Gideon Gono is about to 
become Central Banker, Finance and Trade Ministers melded 
into one. 
 
Sullivan