US embassy cable - 04HARARE1966

UNCLAS SECTION 01 OF 02 HARARE 001966 
 
SIPDIS 
 
STATE FOR AF/S 
USDOC FOR ROBERT TELCHIN 
TREASURY FOR OREN WYCHE-SHAW 
PASS USTR FLORIZELLE LISER 
STATE PASS USAID FOR MARJORIE COPSON 
 
SENSITIVE 
 
E. O. 12958: N/A 
TAGS: EFIN, ECON, ETRD, EINV, PGOV, ZI, Economic Policy 
SUBJECT: A Rose-Tinted 2005 Budget 
 
 
Sensitive but unclassified.  Not for Internet posting. 
 
Ref: a) Harare 1818   b) Harare 1588 
 
1. (U) Summary: Echoing the line laid out in Reserve Bank 
(RBZ) Governor Gideon's Oct 28 address (ref a), acting 
GOZ Finance Minister Herbert Murerwa forecast robust 3.5- 
5 percent GDP growth and 30-50 percent inflation for 
2005.  In his long annual budget presentation to 
Parliament on Nov 25, Murerwa dodged everything and 
anything controversial, including why Chris Kuruneri, 
jailed since March, remains finance minister.  Murerwa 
did not utter the phrase "exchange rate," the economy's 
most debated matter, and suggested no timetable for 
dealing with other macroeconomic distortions, such as 
negative real interest rates and high statutory reserve 
requirements.  In our view, the GOZ will not achieve 
these bullish goals.  Nonetheless, if the GOZ carries out 
a significant devaluation of the zimdollar in 2005, we 
feel the economy could register modest growth from its 
current depressed levels.  End summary. 
 
The Budget in a Nutshell 
------------------------ 
2. (U) The Finance Minister expects 3.5-5 percent 
positive growth driven by production increases of 16 
percent in agriculture and 7.5 percent in mining.  He did 
not project tourist sector growth but said it will 
"benefit tremendously" from a burgeoning influx of 
Chinese tourists.  Murerwa forecast manufacturing output 
will recede by only 5 percent, its lowest annual decline 
since 1998.  In order to spur growth, Murerwa proposes 
supply-side tax cuts by raising the thresholds for all 
tax brackets.  Finally, Murerwa reiterated the RBZ's 
expectation of 30-50 percent inflation, down from the 
current 206 percent. 
 
3. (SBU) Is it all possible?  Since the GOZ has still to 
reach many critical decision crossroads, it is hard to 
forecast the economy's 2005 performance.  For example, no 
observer could have predicted in late-2003 that gold 
exports would rebound from 12 to 20 tons this year, since 
Gono did not establish a preferential exchange rate for 
bullion until March.  A significant devaluation, whether 
across-the-board or sectoral, would trigger an increase 
in exports and, by extension, GDP.  Likewise, President 
Mugabe's sudden departure, unforeseen at this time, could 
cause tourism and foreign investment to surge.  At this 
juncture, there are many unknowns to be able to make 
confident predictions, although Murerwa is gamely trying 
to put the best face on the situation. 
 
Our Current Best-Guess Scenario 
------------------------------- 
4. (SBU) With that caveat, we offer these cautious 
projections: 
 
- Devaluation.  We believe the GOZ will implement a hefty 
devaluation in 2005, most likely only after March's 
parliamentary elections.  Operating at a Z$5600:US$ rate 
(a 50 percent discount to the parallel market rate), 
exporters are in such dire straits that even the GOZ will 
see the need to grant some relief.  Perhaps tellingly, 
Murerwa's budget calls for 215 percent more spending in 
2005 than in 2004, but forecasts only 30-50 percent 
inflation - implying an enormous and unexplained spike in 
expenditure even after controlling for inflation.  We can 
only attribute this nominal spending increase to the 
GOZ's unspoken anticipation of a large devaluation. 
 
- Economic Growth.  Helped along by this devaluation, we 
feel GDP could register positive growth for the first 
time in seven years.  But we believe it will be on the 
order of .5-1.5 percent rather than the GOZ's forecasted 
3.5-5 percent.  Even though economic output is far below 
its late-1990s peaks, it seems ready to inch up in 
certain sectors.  In tourism, international visitors to 
Zimbabwe are increasing marginally (a topic we elaborate 
upon in septel).  In farming, our own unscientific 
observation suggests small-scale farmers - including land 
reform beneficiaries - have now prepared more land for 
planting than during the 2003/2004 season.  Tobacco 
output may have bottomed out at 65 million kgs, roughly 
75 percent below the 2000 harvest, while cotton output 
continues to grow rapidly.  In mining, exports of 
asbestos, chrome and platinum could take advantage of 
high world prices, provided the GOZ allows a reasonable 
depreciation of the zimdollar as it has for gold exports 
(ref b). 
 
- Inflation.  We do not believe 30-50 percent inflation 
is plausible, especially after a significant devaluation. 
The inflation rate has fallen swiftly in recent months 
because the GOZ's Central Statistical Office (CSO) 
calculates inflation on a year-to-year basis (rather than 
annualizing the current month's rate) and Sept-Nov 2003 
experienced the economy's highest monthly rates (between 
25-34 percent).  Because the Sept-Nov 2004 rates (which 
are well below Sept-Nov 2003 levels) are currently being 
included in the annual inflation rate calculations, these 
appear to be dropping rapidly.  The impact will be more 
modest when, for example, Feb-Apr 2005 replaces Feb-Apr 
2004's lower monthly rates of 5-6 percent.  We also 
believe the GOZ will fan inflation by printing (i.e., 
expanding money supply) its way through a projected 
budget deficit of 5 percent of GDP, as there are no 
foreign inflows and few buyers for GOZ-issued bonds and 
treasury bills.  In the past, the GOZ compelled local 
pension funds to invest in these "sucker" investments 
that carry negative real interest rates, but the pension 
fund "well" has now been mostly exhausted.   Finally, 
statutory requirements for financial institutions, which 
the GOZ has been treating as a revenue source, have now 
reached a sky-high 60 percent.  It's difficult to imagine 
many more increases.  For these reasons, we see few 
options for deficit financing other than aggressive and 
inflationary money supply growth. 
 
Dell