US embassy cable - 01HARARE2692

C O N F I D E N T I A L HARARE 002692 
 
SIPDIS 
 
STATE FOR AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC 
TREASURY FOR ED BARBER, AND C WILKINSON 
USDOC FOR 4510 ERIC HENDERSON 
STATE PASS USTR/RWHITTAKER 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
LONDON FOR CGURNEY 
PARIS FOR NEARY 
 
E.O. 12958: DECL: 09/13/06 
TAGS: ECON, EFIN, PGOV, ZI 
SUBJECT: IMF ARTICLE IV REVIEW TEAM PROVIDES A BLEAK OUTBRIEF 
AND A GLIMPSE OF THE LIBYA OIL DEAL 
 
CLASSIFIED BY ECON/COMM OFFICER MARK PROKOP, REASON 1.5 (B), 
(D) 
 
REFS: A) HARARE 2577, B) HARARE 2022, C) HARARE 2531, D) HARARE 
2533, E) HARARE 2247 
 
1.  (C) ON SEPTEMBER 12 THE IMF RESREP, GERALD JOHNSON, AND THE 
NEW IMF COUNTRY TEAM LEADER, DAVID COE (REPLACING PAULO 
NEUHAUSS), PROVIDED THE DCM AND ECONOFF WITH AN OUTBRIEF ON THE 
TEAM'S TWO WEEK ARTICLE IV REVIEW OF ZIMBABWE.  COE PROVIDED NO 
SURPRISES OR BOMBSHELLS, AND LAID OUT AN ASSESSMENT OF THE 
COUNTRY THAT MATCHES OUR OWN, AS PROVIDED IN OUR REPORTING. 
COE'S SUMMARIZED OBSERVATIONS ARE THAT THE SITUATION IS DIRE, 
AND ZIMBABWE'S ECONOMIC DECLINE IS ACCELERATING.  OUTPUT, WEAK 
FOR FOUR YEARS, IS NOW DECLINING MORE RAPIDLY THAN WAS THE CASE 
DURING THE LAST TEAM VISIT SIX MONTHS AGO.  THEIR ESTIMATE OF 
REAL GDP DECLINE FOR THE CALENDAR YEAR IS A MINIMUM 7 TO 8 
PERCENT, VERY POSSIBLY MORE.  THE SHARP SLIDE IS EXACERBATED BY 
POOR MACROECONOMIC POLICIES (PRINCIPALLY ACCLERATED MONEY 
SUPPLY GROWTH (REF A), THE LOW INTEREST RATE REGIME (REF B) AND 
THE VERY UNREALISTIC OFFICIAL PEGGED FOREX RATE), AND THE 
PRIMACY OF POLITICS OVER ECONOMIC REALITIES AND REQUIRED STEPS. 
 
2.  (C) THE TEAM LABELED THE ATMOSPHERE AT THE RESERVE BANK AS 
"SURREAL", BUT HAD PRAISE FOR THE FINANCE MINISTRY'S HARD LINE 
ON A TIGHT FISCAL POLICY.  ON THE LATTER TOPIC THE IMF OFFICIAL 
                       CONFIDENTIAL 
 
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TOLD US THAT, BARRING A BLOWOUT CAUSED BY AN UPCOMING 
SUPPLEMENTAL BUDGET, THE 2001 GOVERNMENT DEFICIT IS CURRENTLY 
PROJECTED TO FALL WELL WITHIN THE TARGET OF 15.5 PERCENT OF 
GDP.  THE BIGGEST SUCCESS COMPONENT IS REDUCED INTEREST 
EXPENSES DUE TO THE GOVERNMENT-INDUCED LOW INTEREST RATE 
REGIME, AS WELL AS THE RESTRUCTURING OF THE MATURITY PROFILE OF 
OFFICIAL, DOMESTIC DEBT.  ALTHOUGH THE FINANCE MINISTRY HAS 
KEPT THE SCREWS TIGHT, NON-INTEREST EXPENDITURES HAVE SWOLLEN 
SLIGHTLY AND ARE PROJECTED TO RESULT IN A 3.5 PERCENT OF GDP 
DEFICIT, VERSUS A TARGETED 2 PERCENT OF GDP SURPLUS.  COE ALSO 
TOLD US THAT HE FULLY EXPECTS ANNUAL INFLATION TO BE IN THE 
THREE-DIGIT RANGE WELL BEFORE YEAREND, IF IT IS NOT ALREADY AT 
SUCH LEVELS (REF C).  BOTH IMF PERSONNEL AGREED FULLY THAT NO 
TURNAROUND EFFORTS CAN BE EXPECTED UNTIL THE PRESIDENTIAL 
ELECTION IS CONCLUDED. 
 
3.  (C) TO OUR INQUIRY ON ANY DETAILS OF THE LIBYAN OIL DEAL 
THEY MIGHT HAVE GLEANED (REFS D, E), THE IMF TEAM LEADER LAID 
OUT AN UNUSUAL FINANCIAL STRUCTURE THAT HAD BEEN PROVIDED THEM 
BY THE OIL PARASTATAL, NOCZIM (WE HAVE NO CONFIRMATION OF 
SUCH AN ARRANGEMENT BY ANY OTHER SOURCES).  MR. COE EXPLAINED 
THAT THE LIBYANS (PER NOCZIM OFFICIALS) ARE COMMITTED TO 
PROVIDING TWO SHIPS A MONTH AT 21,000 MT OF REFINED PRODUCT 
EACH.  ON THE PAYMENT SIDE, NOCZIM CLAIMED THAT A 270-DAY GRACE 
PERIOD FOR HARD CURRENCY REMITTANCE (COMMENCING WITH THE 
UNLOADING) IS A TERM OF THE DEAL, THOUGH ZIMDOLLAR PAYMENT INTO 
A LOCAL ACCOUNT WAS DUE ON DELIVERY.  THE DEAL IS STILL BEING 
NEGOTIATED, WITH DIFFERENCES OVER WHAT EXCHANGE RATE TO USE 
BEING THE BIGGEST POINT OF CONTENTION (THE GOZ NATURALLY WANTS 
TO FUND THE LOCAL CURRENCY ACCOUNT AT THE OFFICIAL RATE OF Z 
$55 TO ONE USD; WHILE THE LIBYANS WOULD LIKELY BE MORE 
                       CONFIDENTIAL 
 
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COMFORTABLE WITH THE BUILDUP BEING AT THE PARALLEL RATE, 
CURRENTLY SOMEWHERE BETWEEN $330 AND $360).  THE RESREP ALSO 
STATED THAT THERE WAS A BARTER COMPONENT, THOUGH HE DID NOT 
KNOW WHAT THE EXPORTS WOULD CONSIST OF, AND ALSO ASSET 
PURCHASES, WITH THE OIL PIPELINE FROM BIERA AND NOCZIM STORAGE 
FACILITIES THE LIKLIEST INITIAL CANDIDATES. 
 
4.  (C) COMMENT: IT IS CLEAR THAT SOME DEAL WITH THE LIBYANS IS 
BEING FINALIZED, THOUGH GETTING SOLID INFORMATION ON THE TERMS 
WILL TAKE ADDITIONAL TIME.  A DEFERRED PAYMENT PLAN FOR THE 
HARD CURRENCY IS WITHOUT DOUBT VERY ATTRACTIVE TO THE CURRENT 
ADMINSTRATION, AS IT PUSHES THE PAINFUL ACT OF PAYMENTS OFF 
UNTIL AFTER THE ELECTIONS.  WE ARE HIGHLY CERTAIN THAT THE 
FINAL TERMS WILL REQUIRE MORE OF ZIMBABWE THAN CURRENTLY MEETS 
THE EYE, AND THAT THE CONSEQUENCES OF THIS RECENTLY EXPANDED 
FRIENDSHIP WITH LIBYA WILL NOT BE ALL FOR THE POSITIVE. 
 
ROTH 
 
                       CONFIDENTIAL 
 
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