US embassy cable - 04HARARE2006

C O N F I D E N T I A L SECTION 01 OF 02 HARARE 002006 
 
SIPDIS 
 
AF/S FOR BNEULING 
NSC FOR SENIOR AFRICA DIRECTOR C. COURVELLE, D. TEITELBAUM 
TREASURY FOR OREN WYCHE-SHAW, PASS USTR FOR FLORIZELLE 
LISER, STATE PASS USAID FOR MARJORIE COPSON 
 
E.O. 12958: DECL: 12/31/2009 
TAGS: ECON, ETRD, PGOV, ZI, EINV, Economic Policy 
SUBJECT: WITHOUT DEVALUATION, IMF SEES NO RECOVERY 
 
REF: HARARE 1966 
 
Classified By: Ambassador Christopher Dell for reason 1.5 d 
 
1. (SBU) Summary and Recommendation: An International 
Monetary Fund (IMF) technical mission has analyzed the GOZ's 
2005 budget projections and preliminarily concluded that 
Zimbabwe will suffer a 10.5 percent budget deficit and 
inflation at over 200 percent next year.  RBZ Governor Gono 
claimed to be "shocked" by this analysis and undertook to win 
President Mugabe's backing for tighter spending controls to 
bring the budget deficit down to 3 percent.  The Fund staff 
will report its findings to the Fund's Executive Directors 
prior to the latter,s late January decision on Zimbabwe's 
compulsory withdrawal.  We recommend Washington press at that 
meeting for Zimbabwe's expulsion with formal censure as a 
fall back option.  End Summary and Recommendation. 
 
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IMF Findings 
------------ 
 
2. (SBU) The 4-member IMF technical team was led by African 
Department Assistant Director Sharmini Coorey and included 
Sonia Munoz, Paul Heytens and Sankett Mohaprata.  The team 
briefed the Ambassador on Dec. 9 and told us that having 
examined the Government's books in detail they are 
forecasting inflation at 200-220 percent for 2005, the 2005 
budget deficit at a staggering 10.5 percent, and GDP growth 
at minus 1.6 percent.   The team's projections contrast 
sharply with the GOZ expectations of 30-50 percent inflation, 
3.5-5 percent growth and a budget shortfall at 5 percent of 
GDP. 
 
3.  (SBU) Coorey said that even granting the GOZ every 
favorable assumption built into its budget, the lowest 2005 
inflation figure the team came up with was 168 percent.  She 
added that unique circumstances in 2004 - artificially high 
demand for money and an appreciating exchange rate 
(Z$6500:US$ on Jan 1 versus Z$5600-6200:US$ today) ) aided 
the GOZ in driving down year-on-year inflation from 623 to 
209 percent in 2004.  These conditions would no longer exist 
in 2005.  Coorey expected 2005 inflation to correlate more 
closely with monetary velocity, belatedly reflecting this 
year's estimated 350 percent reserve money growth. 
 
4. (SBU) Coorey said she was most disturbed about the 
projected budget shortfall of 10-10.5 percent of GDP.  While 
the economy has shrunk over 30 percent since 1997, the public 
sector has grown.  For several years, the GOZ financed the 
deficit through private pension funds, requiring fund 
managers to invest in government paper carrying negative real 
rates.  The GOZ has now largely depleted these resources. 
(N.B., we frequently encounter retirees who once supported a 
middle-class lifestyle from their annuity but now receive 
less than US$100/month.)  Coorey said Reserve Bank Governor 
Gideon Gono admitted current spending plans represent an 
"election budget," implying the GOZ would not enforce fiscal 
discipline prior to March's parliamentary elections.  The 
budget calls for a 270 percent raise for GOZ civil servants, 
clearly designed to ensure ZANU-PF holds onto its voters in 
the March elections. 
 
5. (SBU) The IMF team said that based on its research, the 
GOZ seems almost certain to devalue its currency in 2005, a 
view we share (reftel).   Through currency depreciation, the 
GOZ could reduce public spending in real terms and phase out 
loans to exporters that carry heavily-negative real rates. 
Because Zimbabwe's private sector is operating far below its 
productive capacity, especially in mining, the IMF team 
believes the economy could revert to moderately positive 
growth after a significant devaluation.  The GOZ faces a 
tradeoff between inflation/devaluation on one hand and 
output/growth on the other. 
 
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Gono,s Reaction 
--------------- 
 
6. (SBU) At a chance meeting on December 10, Coorey briefed 
the Ambassador on her discussion with RBZ Governor Gono, the 
evening of December 9.  She said Gono had professed to be 
shocked at the IMF team,s findings and had promised action, 
especially with respect to the budget deficit.  Gono said he 
would get President Mugabe to sign a letter to the IMF to 
that effect before Coorey left Zimbabwe.  Coorey said she was 
carrying a copy of the letter with her back to Washington. 
Subsequently acting Minister of Finance Herbert Murerwa told 
the Ambassador that the GOZ believes the IMF had used some 
bad information in its analysis and later altered its 
conclusions.  Murerwa also said the government would bring 
the deficit down to 7.5 percent. 
 
--------------------------------- 
Comment and Action Recommendation 
--------------------------------- 
 
7. (SBU) Comment: The IMF team's report provides solid 
justification for Zimbabwe's compulsory withdrawal from the 
Fund and we recommend Washington pursue this option at the 
January IMF Executive Directors' meeting.  If it is not 
possible to build a majority in favor of compulsory 
withdrawal, we recommend pursuing a formal Motion of Censure 
against Zimbabwe.  According to the IMF staff, action on 
compulsory withdrawal by the Fund's Board of Governors could 
not take place before the September annual meeting in any 
case.  Besides expressing real disapproval of Zimbabwe's 
economic performance, a vote in favor of either compulsory 
withdrawal or censure in January will be an important signal 
to Zimbabwe's embattled electorate in the run up to the March 
parliamentary elections.  A vote to defer a decision for an 
additional six months will be conversely spun in the official 
media as both a victory for Mugabe against Zimbabwe's enemies 
and approval for the GOZ's economic policies.  As to 
President Mugabe,s letter promising action, talk is cheap, 
especially in an election year. 
DELL