US embassy cable - 00HARARE4207

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 004207 
 
SIPDIS 
 
STATE FOR AF, AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC 
TREASURY FOR ED BARBER, GRACE SONE 
USDOC FOR 4510 ERIC HENDERSON 
STATE PASS USTR/RWHITTAKER 
STATE PASS NSC FOR SENIOR AFRICA DIRECTOR GAYLE SMITH 
 
E.O. 12958: DECL: 07/31/07 
TAGS: EFIN, PGOV, ZI 
SUBJECT: ZIMBABWE'S IMF RESREP ON THE RELATIONSHIP 
AND THE ECONOMY 
                       CONFIDENTIAL 
 
 
PAGE 02        HARARE  04207  01 OF 03  311108Z 
 
CLASSIFIED BY ECON/COMM OFFICER MARK PROKOP, REASON 
1.5 (B), (D) 
 
REFS: A) HARARE 2927, B) HARARE 2684, C) HARARE 2081, 
D) HARARE 4084 
 
1.  (C) SUMMARY: IN A MEETING ON JULY 28 THE IMF 
RESREP, ROBERT FRANCO, PROVIDED ECONOFF WITH 
INFORMATION ON UPCOMING IMF ACTIONS ON ZIMBABWE. 
FRANCO ALSO SHARED HIS BLEAK OUTLOOK ON THE CURRENT 
STATE OF THE ECONOMY.  FOREMOST ON HIS LIST OF 
CONCERNS WAS: THE GOZ'S VERY POOR BUDGET PERFORMANCE; 
THREATS TO THE VIABILITY OF THE COMMERCIAL FARMING 
AND MINING SECTORS (WHICH TOGETHER BRING IN MORE THAN 
HALF OF ZIMBABWE'S FOREIGN EXCHANGE EARNINGS); AND 
THE ONGOING HEAD-IN-THE-SAND ATTITUDE OF ZIMBABWE'S 
SENIOR LEADERSHIP.  THE IMF OFFICIAL BELIEVES THAT 
THINGS WILL GET WORSE ECONOMICALLY OVER THE NEXT YEAR 
OR TWO, BEFORE THE BOTTOM IS REACHED AND A TURNAROUND 
SLOWLY ACHIEVED.  WHILE FRANCO FERVENTLY HOPES THAT 
THE HIGHLY RESPECTED NEW MINISTERS OF INDUSTRY AND 
FINANCE (RESPECTIVELY NKOSONA MOYO AND SIMBA MAKONI) 
WILL BE GIVEN AUTONOMY AND CLOUT TO EFFECT POSITIVE 
CHANGE AND INTRODUCE RATIONAL POLICIES, HE IS NOT 
OPTIMISTIC THAT THE PRESIDENT OR POLITBURO WILL 
BESTOW SUCH POWERS.  END SUMMARY. 
 
---------------------------------------- 
THE IMF'S NEAR TERM SCHEDULE IN ZIMBABWE 
---------------------------------------- 
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PAGE 03        HARARE  04207  01 OF 03  311108Z 
 
2.  (C) FRANCO TOLD US THAT THE IMF'S DEPUTY 
DIRECTOR, STANLEY FISHER, IS CURRENTLY TRAVELING IN 
AFRICA (HE EXPLAINED THAT THIS WAS NOT "OFFICIAL 
TRAVEL") AND WOULD BE IN VICTORIA FALLS DURING THE 
WEEK OF JULY 31.  CAPITALIZING ON THIS OPPORTUNITY, 
THE IMF RESREP HAD SET UP A LUNCH MEETING TO 
INTRODUCE THE NEW FINANCE MINISTER, SIMBA MAKONI, TO 
FISHER.  FRANCO OPINED THAT THE MESSAGE THE FUND'S 
DEPUTY DIRECTOR WOULD DELIVER TO MAKONI WOULD BE THE 
SAME AS THAT RELAYED BY FUND MANAGING DIRECTOR 
KOEHLER A FEW WEEKS AGO IN MOZAMBIQUE TO THE PREVIOUS 
FINANCE MINISTER, HERBERT MURERWA.  THE MESSAGE 
DELIVERED IN MAPUTO WAS THAT THE FUND IS WILLING TO 
WORK WITH ZIMBABWE, BUT THAT MINIMUM CONDITIONS MUST 
BE ADHERED TO AND COMMITMENT AND PROGRESS ON TARGETS 
AND POLICIES MUST BE DEMONSTRATED BEFORE A PROGRAM IS 
AGREED UPON AND MONIES BEGIN TO FLOW.  DIALOGUE AND 
PROMISES NEEDED TO BE BACKED UP BY ACTION AND 
DEMONSTRABLE RESULTS.  FRANCO BELIEVES THAT SUCH A 
HURDLE WILL PROVE TOO DIFFICULT FOR ZIMBABWE TO 
OVERCOME UNDER THE CURRENT ZANU-PF LED REGIME. 
 
3.  FRANCO ALSO INFORMED ECONOFF THAT A SIX MEMBER 
ARTICLE IV REVIEW TEAM, HEADED BY MR. NEUHAUS, WOULD 
ARRIVE AUGUST 24.  HE REPEATED THAT, CONTRARY TO 
LOCAL PRESS REPORTS, THE TEAM WAS NOT COMING TO 
DISCUSS A NEW CREDIT OR THE RESUMPTION OF LENDING. 
AS HE HAD TOLD US EARLIER IN THE YEAR (REF B), HE 
FIRMLY BELIEVED THAT A SHADOW PROGRAM OF AT LEAST SIX 
MONTHS WOULD BE REQUIRED BEFORE A NEW CREDIT COULD BE 
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PAGE 04        HARARE  04207  01 OF 03  311108Z 
NEGOTIATED OR PUT FORTH FOR BOARD APPROVAL.  THE 
VISITING TEAM WOULD RESTRICT ITSELF TO EXAMINING 
ECONOMIC RESULTS FOR THE FIRST TWO QUARTERS OF THE 
YEAR, ADDING THAT THEY WERE IN FOR A SHOCK WHEN THEY 
SEE HOW BAD ECONOMIC CONDITIONS AND THE GOVERNMENT 
BUDGET ARE. 
 
------------------------ 
THE STATE OF THE ECONOMY 
------------------------ 
 
4.  (C) TURNING TO ECONOMICS, THE RESREP AND ECONOFF 
COMPARED NOTES ON ZIMBABWE, AND FOUND LITTLE TO 
DIFFER ON IN OUR DATA AND ASSESSMENTS.  BASED ON 
CUMULATIVE FIGURES THROUGH END-MAY, THE BUDGET 
DEFICIT IS CURRENTLY RUNNING AT ABOUT 16 PERCENT AND 
IS FORECAST TO TOP 20 PERCENT BY YEAR-END.  (IN APRIL 
THE EMBASSY PREDICTED IN REF C THAT THE DEFICIT WOULD 
EASILY HIT 18-20 PERCENT.)  THE FORECAST MEANS THAT 
THE GOZ WILL HAVE TO FINANCE A 2000 BUDGET DEFICIT OF 
CLOSE TO ZIM $70 BILLION (OR ABOUT U.S. $1.85 BILLION 
AT THE OFFICIAL RATE OF Z$38), AN ASTRONOMICAL 
FIGURE.  (ZIMBABWE'S 1999 GDP IS ESTIMATED AT ABOUT 
U.S. $5.6 BILLION.)  SUCH FINANCING WILL ADD TO THE 
ALREADY VERY HIGH STOCK OF TREASURY BILLS, WHICH AT 
 
                       CONFIDENTIAL 
 
                           CONFIDENTIAL     PTQ2252 
 
PAGE 01        HARARE  04207  02 OF 03  311108Z 
ACTION AF-00 
 
INFO  LOG-00   NP-00    AID-00   AMAD-00  CEA-01   CIAE-00  CTME-00 
      DODE-00  SRPP-00  DS-00    EB-00    EXIM-01  E-00     VC-00 
      FRB-00   H-01     TEDE-00  INR-00   IO-00    ITC-01   LAB-01 
      L-00     VCE-00   AC-01    NSAE-00  NSCE-00  OIC-02   OMB-01 
      OPIC-01  PA-00    PM-00    PRS-00   ACE-00   P-00     SP-00 
      SSO-00   STR-00   USIE-00  FMP-00   PMB-00   DSCC-00  DRL-02 
      G-00     NFAT-00  SAS-00     /012W 
                  ------------------745A0E  311109Z /38 
P 311108Z JUL 00 
FM AMEMBASSY HARARE 
TO SECSTATE WASHDC PRIORITY 6722 
INFO SOUTHERN AFRICAN DEVELOPMENT COMMUNITY 
USDOC WASHDC 
DEPTTREAS WASHDC 
 
C O N F I D E N T I A L SECTION 02 OF 03 HARARE 004207 
 
SIPDIS 
 
STATE FOR AF, AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC 
TREASURY FOR ED BARBER, GRACE SONE 
USDOC FOR 4510 ERIC HENDERSON 
STATE PASS USTR/RWHITTAKER 
STATE PASS NSC FOR SENIOR AFRICA DIRECTOR GAYLE SMITH 
 
E.O. 12958: DECL: 07/31/07 
TAGS: EFIN, IMF, PGOV, ZI 
SUBJECT: ZIMBABWE'S IMF RESREP ON THE RELATIONSHIP 
AND THE ECONOMY 
                       CONFIDENTIAL 
 
PAGE 02        HARARE  04207  02 OF 03  311108Z 
 
THIS TIME IS CLOSE TO ZIM $85 BILLION (AT A CURRENT 
AVERAGE RATE OF 59 PERCENT).  FOUR YEARS AGO THE 
STOCK OF TREASURY BILLS WAS ZIM $13 BILLION.  THE T- 
BILL FINANCING WILL FURTHER CROWD OUT INVESTMENT BY 
THE PRIVATE SECTOR, ADD TO INTEREST RATE PRESSURE, 
AND RESULT IN INCREASED INTEREST PAYMENTS.  THIS 
YEAR'S BUDGET DEFICIT IS ALSO BEING FINANCED BY USE 
OF THE GOVERNMENT OVERDRAFT AT THE RESERVE BANK, 
WHICH AT JUNE 23 WAS ZIM $10.6 BILLION COMPARED TO 
$3.5 BILLION AT JUNE 30, 1999.  THE CURRENT OVERDRAFT 
INTEREST RATE IS 70 PERCENT. 
 
5.  (C) RESERVE MONEY IS GROWING AT AN ANNUAL RATE OF 
68.5 PERCENT (A ROUGH GUIDE TO FUTURE INFLATION), AND 
INFLATION MEASURED BY CHANGES IN THE CONSUMER PRICE 
INDEX IS 58.7 PERCENT (MAY 1999/MAY 2000).  USABLE 
RESERVES OF THE CENTRAL BANK ARE CURRENTLY EQUAL TO 
JUST A FEW DAYS OF IMPORTS, AND THE STOCK OF EXTERNAL 
ARREARS ON JUNE 23 WAS U.S. $114.4 MILLION, OF WHICH 
$37 MILLION IS GOVERNMENT-GUARANTEED DEBT.  IN 
ADDITION, THERE ARE PRIVATE SECTOR ARREARS OF AT 
LEAST U.S. $225 MILLION, INCLUDING $75 MILLION OF 
SUPPLIERS' CREDITS. 
 
6.  (C) WITH REGARD TO THE REAL SECTOR, INVESTMENT, 
BOTH DOMESTIC AND EXTERNAL, HAS COME TO A STANDSTILL. 
IN 1999 REAL GDP GROWTH WAS NEGATIVE TO THE TUNE OF 
ABOUT ONE PERCENT.  IN 2000 THE DECLINE IS FORECAST 
AT BETWEEN 5 AND 10 PERCENT; ON A PER CAPITA BASIS, 
THE DECLINE IS ABOUT 2.8 PERCENTAGE POINTS HIGHER. 
                       CONFIDENTIAL 
 
PAGE 03        HARARE  04207  02 OF 03  311108Z 
THE PEGGING OF THE ZIMBABWE DOLLAR SINCE JANUARY 1999 
AT THE OFFICIAL EXCHANGE RATE OF U.S. $1 EQUALS ZIM 
$38 HAS SEVERELY DISTORTED FINANCIAL MARKETS AND 
FUNDS FLOWS, AND ALONG WITH DECLINING EXPORTS HAS 
CAUSED THE HARD CURRENCY SHORTAGE.  THE OFFICIAL RATE 
POSES A LIFE-THREAT TO THE VIABILITY OF EXPORTERS WHO 
ARE FORCED TO REMIT SOME OR ALL OF THEIR PROCEEDS TO 
THE RESERVE BANK AT THE DIRECTED RATE (GOLD PRODUCERS 
100 PERCENT, SEE REF D, AND TOBACCO GROWERS, 25 
PERCENT).  FRANCO AGREED WITH ECONOFF'S EVALUATION 
THAT MOVEMENT BY THE GOVERNMENT AND THE NEW MINISTERS 
ON THE EXCHANGE RATE ISSUE WILL BE THE FIRST ACID 
TEST OF THE WILL AND ABILITY OF THE RULING PARTY TO 
BECOME PART OF THE SOLUTION TO ZIMBABWE'S ECONOMIC 
ILLS. 
 
-------------------- 
ARREARS TO THE IFI'S 
-------------------- 
 
7.  (C) AS OF JULY 28 ZIMBABWE'S ARREARS TO THE WORLD 
BANK STOOD AT U.S. $28 MILLION.  FRANCO HAS SEEN NO 
REAL EFFORT TO DATE BY THE GOZ TO PAY THE ARREARS. 
THE WORLD BANK RESREP "ONCE THE MOST OPTIMISTIC OF 
FELLOWS" ACCORDING TO FRANCO, HAD HIMSELF BEGUN TO 
LOSE HEART IN ZIMBABWE, TIRED OF CONSISTENTLY HAVING 
PROMISES MADE TO HIM BROKEN. 
 
8.  (C) WHILE ZIMBABWE HAS REMAINED CURRENT IN ITS 
PAYMENTS TO THE IMF, HE BELIEVES THIS WILL SOON 
CHANGE.  ON JULY 28 ZIMBABWE OWED THE FUND U.S. $6.5 
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PAGE 04        HARARE  04207  02 OF 03  311108Z 
MILLION, AND THE RESERVE BANK GOVERNOR HAD TOLD HIM 
THE AFTERNOON BEFORE THAT IT WOULD BE UNABLE TO MAKE 
THE PAYMENT ON SCHEDULE.  THE GOVERNOR PROMISED HIS 
BEST EFFORTS TO MAKE THE PAYMENT THE WEEK OF JULY 31, 
BUT COULD MAKE NO GUARANTEES.  FRANCO DESCRIBED THE 
DEVELOPMENT AS "SUICIDAL." 
 
9.  (C) THE RESREP ALSO INFORMED US THAT EVEN IF THIS 
RELATIVELY SMALL PAYMENT IS MADE, ZIMBABWE WILL FACE 
A FUND PAYMENT OF U.S. $55 MILLION IN AUGUST.  FRANCO 
JUST SHOOK HIS HEAD AT THIS PROSPECT, WRYLY OBSERVING 
THAT THE ARRIVAL OF THE ARTICLE IV AUDIT TEAM WILL 
LIKELY COINCIDE WITH ZIMBABWE'S DEFAULT ON ITS IMF 
DEBT.  REVEALING FOR THE FIRST TIME THAT HIS NEXT AND 
LIKELY FINAL ASSIGNMENT BEFORE RETIREMENT WILL BE 
OUAGADOUGOU (FRANCO WILL BE OPENING A NEW FUND OFFICE 
THERE BY YEAR END), THE 27 YEAR IMF-VETERAN COMMENTED 
THAT EVEN THOUGH OUAGADOUGOU IS A ROUGH ASSIGNMENT, 
CONDITIONS WILL PROBABLY BE BETTER THERE THAN WHAT 
HARARE LOOKS SET TO BECOME IN THE NEAR FUTURE. 
 
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COMMENT 
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                       CONFIDENTIAL 
 
                           CONFIDENTIAL     PTQ2251 
 
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ACTION AF-00 
 
INFO  LOG-00   NP-00    AID-00   AMAD-00  CEA-01   CIAE-00  CTME-00 
      DODE-00  SRPP-00  DS-00    EB-00    EXIM-01  E-00     VC-00 
      FRB-00   H-01     TEDE-00  INR-00   IO-00    ITC-01   LAB-01 
      L-00     VCE-00   AC-01    NSAE-00  NSCE-00  OIC-02   OMB-01 
      OPIC-01  PA-00    PM-00    PRS-00   ACE-00   P-00     SP-00 
      SSO-00   STR-00   USIE-00  FMP-00   PMB-00   DSCC-00  DRL-02 
      G-00     NFAT-00  SAS-00     /012W 
                  ------------------745A16  311108Z /38 
P 311108Z JUL 00 
FM AMEMBASSY HARARE 
TO SECSTATE WASHDC PRIORITY 6723 
INFO SOUTHERN AFRICAN DEVELOPMENT COMMUNITY 
USDOC WASHDC 
DEPTTREAS WASHDC 
 
C O N F I D E N T I A L SECTION 03 OF 03 HARARE 004207 
 
SIPDIS 
 
STATE FOR AF, AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC 
TREASURY FOR ED BARBER, GRACE SONE 
USDOC FOR 4510 ERIC HENDERSON 
STATE PASS USTR/RWHITTAKER 
STATE PASS NSC FOR SENIOR AFRICA DIRECTOR GAYLE SMITH 
 
E.O. 12958: DECL: 07/31/07 
TAGS: EFIN, IMF, PGOV, ZI 
SUBJECT: ZIMBABWE'S IMF RESREP ON THE RELATIONSHIP 
AND THE ECONOMY 
                       CONFIDENTIAL 
 
PAGE 02        HARARE  04207  03 OF 03  311108Z 
 
10.  (C) FRANCO, CLEARLY STYMIED AND DISAPPOINTED BY 
THE RESULTS OF HIS TENURE IN ZIMBABWE, IS NOT AT THE 
MOMENT ONE OF ITS BIGGEST FANS.  HOWEVER, HIS AND THE 
FUND'S ASSESSMENT OF THE DISMAL FIRST-HALF-OF-THE- 
YEAR PERFORMANCE NUMBERS AGREE WITH OUR OWN ECONOMIC 
EVALUATION AND REPORTING.  THE DEBT HOLE THE COUNTRY 
HAS DUG ITSELF IS EXTREMELY DEEP AND WILL TAKE AT A 
MINIMUM TWO TO THREE YEARS TO CLIMB OUT OF UNDER THE 
BEST OF CIRCUNSTANCES.  IT REMAINS TO BE SEEN WHETHER 
THE NEW INDUSTRY AND FINANCE MINISTERS WILL HAVE THE 
AUTONOMY, AND STOMACH TO MAKE THE TOUGH DECISIONS 
NECESSARY.  EXPERIENCE HAS SHOWN THAT BOTH PRESIDENT 
MUGABE AND HIS POLITBURO ARE LOATH TO MAKE ANY 
CONCESSION ON POWER, PARTICULARLY TO OUTSIDERS, AS 
THESE MINISTERS STILL CLEARLY ARE.  END COMMENT. 
 
IRVING 
 
                       CONFIDENTIAL 
 
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