US embassy cable - 01HARARE1066

C O N F I D E N T I A L SECTION 01 OF 02 HARARE 001066 
 
SIPDIS 
 
STATE FOR AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC 
TREASURY FOR ED BARBER, BARAK HOFFMAN 
USDOC FOR 2037 ERIC HENDERSON 
STATE PASS USTR/RWHITTAKER 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
 
E.O. 12958: DECL: 03/20/11 
TAGS: EFIN, PGOV, ZI 
SUBJECT: IMF REVIEW TEAM PROVIDES A BLEAK OUTBRIEF 
                       CONFIDENTIAL 
 
PAGE 02        HARARE  01066  01 OF 02  210539Z 
WITH NO NEW SURPRISES 
 
CLASSIFIED BY ECON/COMM OFFICER MARK PROKOP, REASON 
1.5 (B), (D) 
 
REFS: A) HARARE 976, B) 2000 HARARE 5072 
 
1.  (C) SUMMARY: ON MARCH 20 THE IMF RESREP, GERRY 
JOHNSON, AND THE IMF TEAM LEADER, PAULO NEUHAUS, GAVE 
THE DONOR COMMUNITY AN HOUR-LONG OUTBRIEF ON THE 
RESULS OF ITS 12 DAY VISIT TO ZIMBABWE.  NEUHAUS 
PROVIDED NO NEW SURPRISES OR BOMBSHELLS, BUT DID 
REVEAL, AS ANTICIPATED, THAT "THE CURRENT ECONOMIC 
SITUATION IS VERY BAD AND WORRISOME, AND THE OUTLOOK 
IS NEGATIVE."  COMMENTING THAT PROGRESS BY THE GOZ ON 
ECONOMIC COMMITMENTS MADE AFTER THE SEPTEMBER 2000 
VISIT HAS BEEN FROZEN SINCE OCTOBER, NEUHAUS 
DESCRIBED THE VISIT AS ANOTHER OPPORTUNITY TO CHART 
OUT A RECOMMENDED PATH FORWARD.  THE FUND'S MINIMUM 
CRITERIA FOR RE-ENGAGEMENT (THE FIRST STEP OF WHICH 
WOULD BE A STAFF MONITORED PROGRAM, OR SMP) ARE: 
DEVALUATION AND A CREDIBLE FOREIGN EXCHANGE POLICY; 
DRASTIC MONETARY POLICY TIGHTENING; THE RAISING OF 
PARASTATAL TARIFFS (ELECTRICITY, FUEL ETC.) TO STEM 
OPERATING LOSSES; AND STRICT ADHERENCE TO THE 
SPENDING LIMITS CONTAINED IN THE 2001 BUDGET.  THIS 
VISIT WAS A FOLLOW-UP TO THE ARTICLE IV BOARD REVIEW 
OF ZIMBABWE IN DECEMBER 2000, FINANCE MINISTER 
MAKONI'S VISIT TO WASHINGTON LAST MONTH, AND THE 
RECENT KOHLER/WOLFENSOHN/MUGABE MEETING IN DAR ES 
SALAM.  LOOKING AHEAD, THE IMF WILL OBSERVE WHAT 
                       CONFIDENTIAL 
 
PAGE 03        HARARE  01066  01 OF 02  210539Z 
POSITIVE STEPS ZIMBABWE TAKES, AND WAIT FOR IT TO 
SUBMIT AN ACTION PLAN, HOPEFULLY BEFORE THE SPRING 
IMF/WB MEETINGS IN WASHINGTON. 
 
2.  (C) OTHER ECONOMIC DATA SHARED ARE THE FUND'S 
ESTIMATE THAT EVEN WITH THE FULL IMPLEMENTATION OF 
BEST POLICIES AND PRACTICES IMMEDIATELY, REAL GDP 
WILL SHRINK BY AT LEAST FIVE PERCENT THIS YEAR.  IF 
ZIMBABWE STAYS WITH CURRENT POLICIES, THE FUND 
BELIEVES THAT THE ECONOMY WILL CONTRACT SHARPLY, WITH 
15 TO 20 PERCENT SHRINKAGE HIGHLY POSSIBLE.  "A 
HUMANITARIAN DISASTER IS LOOMING," NEUHAUS TOLD THE 
AUDIENCE, "AND WE SPEAK HONESTLY TO THEM ABOUT THE 
DANGERS."  AFTER THE PUBLIC SESSION NEUHAUS CONFIDED 
TO US THAT ZIMBABWE WAS IN ARREARS TO THE FUND ON ITS 
PAYMENTS, WITH A LITTLE OVER U.S. 18 MILLION OVERDUE 
BY ABOUT 20 DAYS.  NEUHAUS EXPECTS THE ARREARS TO 
GROW, AS SPENDING FOR ENERGY TAKES PRECEDENCE OVER 
LOAN REPAYMENTS.  "IF THE WILL IS THERE WE WILL WORK 
TOGETHER," NEUHAUS SAID, "BUT ZIMBABWE'S POLITICS 
MUST DECIDE WHAT THE FUTURE WILL BRING."  END 
SUMMARY. 
 
---------------- 
FACING THE ABYSS 
---------------- 
 
3.  (C) THE IMF TEAM LEADER, PAULO NEUHAUS, PRESENTED 
A HARSH ASSESSMENT OF ZIMBABWE'S FAILURE TO EXECUTE 
EVEN BASIC PRINCIPLES OF GOOD ECONOMIC STEWARDSHIP. 
HIS TICKLIST OF BAD BEHAVIOR INCLUDED VERY POOR AND 
                       CONFIDENTIAL 
 
PAGE 04        HARARE  01066  01 OF 02  210539Z 
EVEN DAMAGING MONETARY POLICIES (FOR EXAMPLE THE 
RECENT ENGINEERED INTEREST SLIDE), THE CONTINUED 
FREEZE OF THE PEGGED FOREIGN EXCHANGE RATE, THE 
FAILURE TO INCREASE FUEL PRICES, THE UNREVEALED COSTS 
OF THE CONGO MILITARY PRESENCE, AND THE ONGOING LAND 
RESETTLEMENT MOVES WHICH HAVE EXTINGUISHED INVESTOR 
CONFIDENCE AND FROZEN OUT THE DONORS.   ANOTHER 
EXAMPLE OF THE COUNTER-PRODUCTIVE STEPS THEY HAVE 
TAKEN, HE EXPLAINED, IS THE RECENT PROGRAM TO LEND 
STATUTORY RESERVES AT 15 PERCENT TO POTENTIAL 
EXPORTERS, A FACT THAT ENCOURAGES THEM TO HIDE EXPORT 
RECEIPTS EXTERNALLY, AT LEAST TILL DEVALUATION OCCURS 
AND INFLATION SLOWS DOWN.  WHILE THE PEOPLE WE SPOKE 
WITH ARE NOT IN DENIAL," SAID NEUHAUS, "WHAT THEY CAN 
CONVINCE THEIR SUPERIORS TO DO IS VERY PROBLEMATIC 
AND UNKNOWN."  THEIR ACTIONS OVER THE COMING MONTHS 
WILL BE KEY IN DETERMINING IF THE RELATIONSHIP AWAKES 
FROM "ITS PRESENT DORMANCY." 
 
------------- 
THE WAY AHEAD 
------------- 
 
4.  (C) NEUHAUS WAS CLEAR THAT RESUMPTION OF FUNDING 
FOR ZIMBABWE IS A LONG WAY OFF.  FIRST THE GOVERNMENT 
 
                       CONFIDENTIAL 
 
                           CONFIDENTIAL     PTQ7622 
 
PAGE 01        HARARE  01066  02 OF 02  210539Z 
ACTION AF-00 
 
INFO  LOG-00   NP-00    AID-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  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 
                  ------------------D4F3F9  210539Z /38 
P 210535Z MAR 01 
FM AMEMBASSY HARARE 
TO SECSTATE WASHDC PRIORITY 8472 
INFO NSC WASHDC PRIORITY 
SOUTHERN AFRICAN DEVELOPMENT COMMUNITY 
USDOC WASHDC 
DEPT OF TREASURY WASHDC 
 
C O N F I D E N T I A L SECTION 02 OF 02 HARARE 001066 
 
SIPDIS 
 
STATE FOR AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC 
TREASURY FOR ED BARBER, BARAK HOFFMAN 
USDOC FOR 2037 ERIC HENDERSON 
STATE PASS USTR/RWHITTAKER 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
 
E.O. 12958: DECL: 03/20/11 
TAGS: EFIN, IMF, PGOV, ZI 
SUBJECT: IMF REVIEW TEAM PROVIDES A BLEAK OUTBRIEF 
                       CONFIDENTIAL 
 
PAGE 02        HARARE  01066  02 OF 02  210539Z 
WITH NO NEW SURPRISES 
 
MUST DESIGN AND AGREE TO FOLLOW A ROADMAP OF SOUND 
MACRO-ECONOMIC POLICIES.  THIS IS FAR FROM THE CASE 
AT PRESENT, AT LEAST IN NEUHAUS' VIEW.  HE CITES AS 
AN EXAMPLE OF THE PATCHWORK QUILT OF ECONOMIC 
POLICIES THE UNEXPECTED, DRASTIC FALL IN INTEREST 
RATES THAT OCCURRED WHEN THE RESERVE BANK FLOODED THE 
MARKET WITH LIQUIDITY IN EARLY FEBRUARY (REFTEL A). 
WHILE IT HAS SAVED THE GOZ SOME INTEREST EXPENSE, DEEPLY 
DEEPLY NEGATIVE INTEREST RATES HAVE CAUSED SAVINGS-HOLDERS 
TO ATTEMPT TO DUMP THEIR ZIMBABWE DOLLARS ON THE 
PARALLEL MARKET, INCREASING DEMAND FOR FOREIGN 
CURRENCY AND DRIVING RATES UP.  NEUHAUS CONTINUED, 
THAT ONLY IF A SOUND MACROECONOMIC PROGRAM IS LAID 
OUT, COULD A STAFF MONITORED PROGRAM WITH QUARTERLY 
TARGETS BE INITIATED.  IF THE RESULTS ARE GOOD (AFTER 
A MINIMUM OF PROBABLY THREE QUARTERS OF MONITORING), 
THEN A FUNDING ARRANGEMENT COULD BE BROUGHT TO THE 
BOARD.  IF TARGETS AND CONDITIONS CONTINUE TO BE MET, 
THEN CONSIDERATION COULD BE GIVEN TO TABLING ZIMBABWE 
AT THE PARIS CLUB FOR RESCHEDULING TALKS.  GIVEN 
POLITICS HERE, THIS IS A PATH STUDDED WITH HIGH 
OBSTACLES. 
 
------- 
COMMENT 
------- 
 
5.  (C) THE ATMOSPHERE DURING THE BRIEFING, WELL 
ATTENDED BY ALL THE MAJOR DONORS, WAS ONE OF "HERE WE 
                       CONFIDENTIAL 
 
PAGE 03        HARARE  01066  02 OF 02  210539Z 
GO ONCE MORE."  NO ONE IN THE ROOM EXPRESSED ANY 
OPTIMISM THAT THIS TIME THINGS WOULD GO DIFFERENTLY, 
OR THAT ZIMBABWE'S PATRIARCHAL LEADER WOULD WAKE UP 
ONE MORNING SOON TO RECOGNIZE THE TWIN SHINING LIGHTS 
OF ECONOMIC COMMON SENSE AND BETTERING THE LIVES OF 
HIS NATION'S CITIZENS.  IN ECONOMIC TERMS THE CHANGES 
THAT HAVE OCCURRED SINCE THE IMF TEAM'S VISIT HERE IN 
SEPTEMBER HAVE ALL BEEN FOR THE WORSE, AND WE DO NOT 
FORESEE A TURNAROUND UNTIL MUGABE IS AT LEAST RE- 
ELECTED, AND MORE LIKELY NOT UNTIL HE NO LONGER SITS 
IN THE PRESIDENTIAL CHAIR.  END COMMENT. 
 
IRVING 
 
                       CONFIDENTIAL 
 
>