US embassy cable - 05HARARE656

C O N F I D E N T I A L SECTION 01 OF 04 HARARE 000656 
 
SIPDIS 
 
AF FOR DAS T. WOODS 
AF/S FOR B. NEULING 
OVP FOR NULAND 
NSC FOR DNSA ABRAMS, SENIOR AFRICA DIRECTOR C. COURVILLE 
 
E.O. 12958: DECL: 12/31/2010 
TAGS: ECON, EMIN, ZI, EFIN, Economic Situation 
SUBJECT: ZIMBABWE'S BELEAGUERED ECONOMY: CAN IT EVER BOUNCE 
BACK? 
 
 
Classified By: Ambassador Christopher Dell under Section 1.4 b/d 
 
1. (C) Summary: Amembassy Harare's departing econchief offers 
some reflections on Zimbabwe's dismal economy, which has been 
in freefall since 1997.  At each policy crossroads, the GOZ 
has chosen and rarely retreated from the interventionist 
path.  Output in nearly every productive sector has fallen by 
at least fifty percent.  Yet there is still great economic 
potential here and the economy could return to growth if the 
GOZ adopted market-friendly approaches to land tenure, 
currency exchange, privatization of parastatals and other 
areas.  However, this can only happen  if the GOZ can wean 
itself from its crippling domination of the economy.  The 
U.S. has a role to play by insisting that liberalization of 
the economy be the condition for any future support from the 
International Financial Institutions (IFIs), which the GOZ 
will have to turn to sooner or later.  End Summary. 
 
----------------------------- 
A Timeline in Economic Demise 
----------------------------- 
 
2. (C) In a string of nightmarish decisions over the past 
seven years, the GOZ has decimated its private sector. 
Consider a few highlights:  In 1997, the GOZ paid an 
unbudgeted US$140 million (i.e., ten percent of the national 
budget) to veterans of the liberation war, triggering a 
print-and-spend cycle where money supply has grown annually 
by 100-400 percent.  In 1999, the GOZ imposed a punitive 
indirect tax on exporters, requiring them to operate using a 
sub-market official exchange rate. In 2000, the GOZ began to 
annul property rights on over ninety percent of the 
country,s prime farmland, relying on political 
considerations to redistribute farms, primarily from white to 
black Zimbabweans. 
 
3. (C) By 2001, the GOZ had made itself the sole broker both 
for the country,s two main food staples ) corn and wheat ) 
and for two of its three top export earners ) tobacco and 
gold.  In 2002, it assumed responsibility for setting the 
wholesale price for cotton - the other leading export ) and 
for thousands of retail products.  In 2003, the GOZ depleted 
private pension accounts, as it required them to invest in 
government bonds with heavily negative real interest rates. 
In 2004, the GOZ introduced productive sector loans and 
foreign currency auctions, guaranteeing profits for favored 
firms by lending to them at negative interest rates and by 
awarding them discounted foreign exchange through the only 
legal channel.  In 2005, the GOZ has threatened to 
expropriate private firms that raise prices, informally 
reinstating price controls on basic commodities. 
 
---------------------- 
Assessing the Wreckage 
---------------------- 
 
4. (C) The consequences of these policies speak for 
themselves.  Since 1997, GDP is off 30-35 percent, exports 
have tumbled from US$3.8 to 1.7 billion, foreign direct 
investment is down from an annual US$300 to 10 million and 
the zimdollar has lost a dizzying 99.9 percent of its value, 
nosediving from Z$16 to 20,000:US$.  The downturn pervades 
nearly every sector.  Tobacco output has fallen from 237 to 
65 million kgs, gold from 30 to 20 tons, ferroalloys from a 
net value US$178 to 67 million, maize from 1,800,000 to (at 
best) 600,000 tons and foreign visitors to top tourist 
destination Victoria Falls from 300,000 to 100,000. 
 
5. (C) Furthermore, the infrastructure that supports economic 
activity ) education, transport, energy and 
telecommunications ) is in shambles.  Ten to twenty percent 
of the population has fled the country, many of them the best 
and brightest like teachers and medical personnel.  Without 
Western food assistance, which amounted to 6 percent of GDP 
in 2002, millions of Zimbabweans would have gone hungry. 
(N.B., the GOZ has signaled that it will make a new food 
appeal this year.) 
 
6. (C) Although they paid a high price in economic terms, the 
government can and does point to black empowerment as a 
success story, as it is arguably the only post-1997 economic 
success the GOZ can claim.  In the mid-1990s, more than a 
decade after the fall of Rhodesia, a tiny white minority 
still dominated the country,s best farmland and top 
companies.  This is no longer the case.  For instance, white 
businesspersons made up only one percent of attendees at last 
year,s convention of the Confederation of Zimbabwe 
Industries (CZI), a white enclave until the late-1990s.  Some 
emerging black movers-and-shakers have gotten where they are 
through political ties, but many ) including Zimbabwe,s 
leading tobacco farmer and the local heads of U.S. 
subsidiaries 3M, Pioneer, Colgate-Palmolive, Dunn & 
Bradstreet and ChevronTexaco - have reached the upper echelon 
through talent and hard work. 
--------------- 
No End in Sight 
--------------- 
 
7. (C) Even with its affirmative action goals accomplished, 
the GOZ is forging further down the interventionist path.  It 
is slowly but steadily seizing remaining white-owned 
commercial farms and has begun targeting the country,s 
private wildlife reserves.  President Mugabe signed 
legislation in February to resurrect the Agricultural 
Marketing Agency, which would make the GOZ the middleman for 
every Zimbabwean crop (in addition to the already-controlled 
maize, wheat and tobacco).  In addition, Reserve Bank (RBZ) 
Governor Gideon Gono wants the GOZ to play the same role for 
cut flowers and platinum, two emerging export earners.  He 
continues to turn the RBZ into a competitor with private 
banks for foreign currency accounts, demanding rent-free 
space for flashy new RBZ branches in airports, shopping 
centers and hotels. 
 
8. (C) As long as the GOZ crowds out the private sector, it 
is hard to envision economic revival.  The GOZ has used tight 
exchange rate controls to limit inflation while still 
pursuing an expansionary monetary policy.  This has caused 
enormous damage to the country's export sector, which in turn 
has made foreign exchange ever scarcer.  Yet the GOZ's 
generally repressive political climate and especially its 
dominance of the media stifle open debate of these policies. 
Although most transactions now take place at the parallel 
exchange rate, the GOZ,s broadcast media and daily 
newspapers ) the hard-line Herald and RBZ Governor Gono,s 
more moderate Mirror ) rarely acknowledge the growing 
divergence between parallel and official rates.  Even after 
January,s 14.1 percent inflation rate, the media recite 
without qualification the RBZ's fanciful forecast of 20-35 
percent annual inflation for 2005. 
 
------------------------- 
Steps to Economic Rebound 
------------------------- 
 
9. (C) What would it take to restore positive growth? 
Perhaps surprisingly, not much.  Firms are operating so far 
below capacity that they could probably expand output after a 
modest improvement in the commercial environment.  In fact, 
if the GOZ addressed only land tenure, the overvalued 
exchange rate, inefficient parastatals and a suitable 
investment climate, it could arrest the economy,s freefall. 
It is worth elaborating upon these four pivotal issues. 
 
10. (C) First, the GOZ must put a working model in place on 
resettled farmland.  These farms may never regain the glory 
of the 1990s, when tiny Zimbabwe beat out Brazil, India, 
China and the U.S. to become the world's top tobacco 
exporter.  Still, the agrarian sector is key:  Most of the 
population remains full- or part-time farmers and many are 
unemployable elsewhere.  Even if the mining eventually 
overtakes agriculture in revenue terms, as we expect it will, 
the mines will not provide anywhere near the amount of jobs 
on farms.  Furthermore, the Government,s abrogation of 
land-title has sent the country,s investment risk premium 
into the stratosphere.  Until the GOZ demonstrates respect 
for private ownership, foreign investors will look elsewhere. 
 
11. (C) The quickest fix?  We believe it lies in the 
oft-discussed 99-year tradable leases for resettled farms. 
Under-performing farmers would quickly sell their allocated 
plots and pocket the windfall.  Better farmers would replace 
them, borrowing against these leases.  For the leases to be 
successful the GOZ will have to resist the temptation to 
intervene and allow the market to decide who is a successful 
farmer.  The GOZ could also go a step further and reaffirm 
the tenure of the remaining 500 white farmers while beginning 
compensation negotiations with the Commercial Farmers Union 
over the 4,000 farms it has seized.  As most dispossessed 
whites have left the country, they would likely entertain 
offers of pennies on the dollar from those occupying their 
land. 
 
12. (C) Second, the GOZ should float its exchange rate.  A 
weaker zimdollar would stimulate agricultural, mining and 
manufacturing exports, bringing more forex into the country. 
Exporters believe they could significantly boost production 
within six months if conditions were right.  More important 
still, the RBZ would have to rein in money supply to contain 
inflation since it could no longer rely on a managed exchange 
rate. 
 
13. (C) Third, the GOZ needs to halt parastatal overstretch. 
Disbanding a single ineffectual parastatal - the Grain 
Marketing Board (GMB) - would incentivize farmers to sell 
their wheat and maize to the highest bidder rather than to 
the GMB at controlled prices.  The GOZ is running budget 
deficits while it mismanages into the ground key parastatals 
such as the railways, power company and national airline.  At 
this point, the GOZ has little to lose by privatizing these 
failed State enterprises. 
 
14. (C) Fourth, Zimbabwe has become one of the world's least 
enticing environments for foreign direct investment (FDI). 
An infusion of FDI would work wonders for this forex-starved 
country.  The head of a local mining firm told us recently 
that his firm would be prepared to invest US$2 billion in 
platinum extraction if conditions were more hospitable.  Yet 
investors like his firm are spooked by controls on the 
movement of forex, overbearing taxation, shaky property 
rights, price controls and other issues. 
 
--------------- 
Will It Happen? 
--------------- 
 
15. (C) Concerning reform, the operative question is probably 
not whether but when.  We are confident the GOZ will 
eventually be forced by economic reality to loosen its 
chokehold on the economy and adopt some variation of the 
steps described in paragraphs 9-13.  It will likely not do so 
by choice but will be driven to this decision by economic 
meltdown.  The country is even now sliding into an economic 
crisis that may prove more severe than that of 2002-03.  The 
amount of zimdollars needed to buy a U.S. dollar on the 
parallel exchange rate has mushroomed from Z$9,000 to 
20,000:US$ since January.  Because so little is now produced 
in Zimbabwe, the country is largely import-depependent and a 
weaker zimdollar drives prices dramatically higher. 
Shortages are becoming common and a food crisis is looming. 
Finally, with exports plummeting and tourism moribund, there 
seems to be no forex available, even on the parallel market. 
 
16. (C) If reform is not too long in coming, the economy will 
return to positive, even robust, growth.  What we do not know 
is whether this will take the GOZ ten months or ten years. 
While President Mugabe's ZANU-PF has an ideological affection 
for Marxism-Leninism, this commitment is shallower than among 
ruling elites in Cuba or North Korea.  At the same time, even 
after seven years of numbing recession, Mugabe seems 
nonplused by an economic policy whose crowning achievement 
has been the transfer of land from productive agro-businesses 
to peasant farmers who rarely feed their families without 
handouts. 
 
17. (C) Unfortunately, as the octogenarian Mugabe ages 
further, it is less and less likely he will embrace a change 
of course.  He increasingly surrounds himself with yes-men 
like Finance Minister Herbert Murerwa, who expresses private 
doubts about the current policy but remains pliant in cabinet 
sessions.  Mugabe's cohorts are addicted to graft and 
privilege, whether it takes the form of reallocated farms, 
government contracts or access to discounted foreign 
exchange.  In economic policy circles, there is no coequal to 
technocratic former Finance Ministers Bernard Chidzero or 
Simba Makoni. 
 
18. (C) Sad to say, but the departing econchief cannot fathom 
economic reform until Mugabe retires, dies or accepts a role 
as figurehead president, taking the Gonos and Murerwas with 
him.  In the meantime, the U.S. can support more liberal 
economic policies by using its influence in the IFIs to exert 
pressure on the GOZ to undertake reforms.  As Makoni recently 
put it to the Ambassador, economic liberalization has not 
exactly been a government "priority." 
 
19 (C) It's continuing failure to embrace reform will only 
lead to further economic contraction, and perhaps ultimately 
political pressure for change in Zimbabwe.  This may not be a 
bad thing.  Having used every repressive trick in the book to 
ward off democratic reform, the collapse of the economy - the 
real source of the ruling ZANU-PF's shrinking support base - 
may yet force Mugabe to accept change.  We need to use our 
influence, both with the IFIs and elsewhere, to ensure that 
there be no bailout for Mugabe absent real economic and 
political reform, which over the longer term could lead to 
greater political liberalization as a populace less beholden 
to government its daily bread finally finds the courage to 
fight for its freedom. 
DELL