US embassy cable - 02HARARE1664

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 001664 
 
SIPDIS 
 
NSC FOR SENIOR AFRICA DIRECTOR JENDAYI FRAZER 
LONDON FOR CGURNEY 
PARIS FOR CNEARY 
 
E.O. 12958: DECL: 07/17/2012 
TAGS: ECON, PGOV, ETRD, ZI 
SUBJECT: ZIMBABWE FINANCE MINISTER PROVIDES STARK ECONOMIC 
PICTURE IN LETTER TO CABINET 
 
 
Classified By: political section chief Matt Harrington. 
Reasons: 1.5 (B) and (D). 
 
Summary 
------- 
 
1.  (C)  In a June 25 letter to the Cabinet's economic and 
finance committe, Finance Minister Simba Makoni provided a 
stark picture of Zimbabwe's economic crisis.  According to 
Makoni, Zimbabwe has no foreign exchange reserves, which has 
prevented the Government from procuring even those products 
it has identified as most critical -- drugs, fuel, 
electricity, and grain -- and paying even its most 
understanding creditors (Zimbabwe's  external arrears now 
total U.S. $1.36 billion.)  HCB Mozambique has recently 
reduced electricity supplies due to non-payment and ESKOM 
South Africa has designated Zimbabwe an "interruptible" 
customer.  Payments are also long overdue to fuel suppliers; 
more than a third of the GOZ's U.S. $106 million debt in the 
fuel sector is owed to the Libyan Arab Foreign Bank, but 
funds are not available to meet that commitment.  The GOZ can 
no longer afford to buy sufficient quanitities of chemicals 
for treatment of drinking water, posing a major public health 
hazard, and it is unable to cover the costs of its diplomatic 
missions overseas.  A major shortfall -- estimated to be U.S. 
$1.15 billion -- in forex requirements between now and March 
2003 will result in either critical shortages of essential 
inputs or further build up in external arrears.  The fact 
that we have a copy of Makoni's letter should be strictly 
protected, as it was an internal document not intended for 
circulation outside of Cabinet.  End Summary. 
 
General economic indicators 
--------------------------- 
 
2. (C) On July 17, a reliable embassy contact with excellent 
sources in the Zimbabwean government provided us with a copy 
of a private June 25 letter from Finance Minister Simba 
Makoni to the Cabinet committee on financial and economic 
affairs.  The letter provides a stark assessment of the 
country's economic crisis, and describes in some detail the 
GOZ's spending priorities, arrearages to key creditors, and 
financial arrangements with Libya.  We have summarized key 
excerpts in this cable and have forwarded the letter by 
classified pouch to AF/S. 
 
Begin Excerpts from Minister Makoni's letter: 
 
3.  (C) Zimbabwe "has no usable foreign exchange reserves," 
which has adversely affected the country's ability to procure 
critical imports such as drugs, fuel, electricity, raw 
materials, and grain.  In addition, Zimbabwe has failed to 
meet its foreign payment obligations "resulting in the 
suspension of disbursements of critical project-related 
loans, thus worsening the balance of payments position."  As 
of mid-June, Zimbabwe's total external payment arrears were 
U.S. $1.36 billion. 
 
4.  (C) A GOZ External Payments Committee (EPC) earlier 
decided to allocate scarce resources to certain critical 
sectors of the economy, but the GOZ does not have even 
sufficient funds for these top priority areas: 
 
--grain, fuel, electricity, drugs, and currency swaps; 
--creditors likely to disburse funds quickly, such as the 
Kuwait Fund and Badea; 
--multilateral institutions; 
--overseas embassies and critical CPO payments (PFMS and 
Security); 
--water treatment chemicals 
 
 
 
Electricity debts 
----------------- 
 
5.  (C) The Zimbabwe Electricity Supply Authority (ZESA) owes 
its electricity suppliers U.S. $21 million and spare parts 
suppliers U.S. $7.4 million.  ZESA's monthly foreign currency 
requirements average U.S. $12 million, but the GOZ has only 
been able to allocate a monthly average of U.S. $5.3 million 
since January, leaving a significant shortfall.  ZESA's 
principal creditors in this sector are 
ESKOM (S. Africa), owed U.S. $5.07 million since 6/14/02; HCB 
(Mozambique), owed U.S. $6.67 million since 4/30/02; EDM 
(Mozambique), owed U.S. $4.14 million for wheeling charges 
since 4/30/02; SNEL (DRC), owed U.S. $4.15 million since 
2000; and ZESCO (Zambia), owed U.S. $1.09 million since 2000. 
 
6.  (C) HCB Mozambique has decided to reduce electricity 
supplies to ZESA effective 6/30/02 due to non-payment, while 
ESKOM has made ZESA an "interruptible" customer, meaning its 
supplies can be reduced at any time.  Meanwhile, SNEL DRC 
has, since April 2002, demanded payment in hard currency. 
 
Fuel debts 
---------- 
 
7.  (C) The National Oil Company of Zimbabwe (NOCZIM) is in 
arrears to the tune of U.S. $106 million, and payments are 
long overdue.  NOCZIM's largest creditor, by far, is the 
Libyan Arab Foreign Bank, which was owed U.S. $43 million as 
of June 22, but  funds are not available to meet this 
commitment.  Other major creditors are BP South Africa (owed 
U.S. $17.8 million since 1999); IPG (owed U.S. $17.8 million 
since 2000); Engen South Africa (owed U.S. $12 million since 
1999); Caltex (owed U.S. $7.8 million since 1999); the 
Government of Botswana (owed U.S. $4.4 million since 2000); 
and Mobil Africa (owed U.S. $1.1 million since 1999). 
 
8.  (C)  The GOZ's agreement with the Libyan Area Foreign 
Bank provides for NOCZIM to deposit the Zimbabwe dollar 
equivalent of oil supplied in an account at the Commercial 
Bank of Zimbabwe (CBZ).  The funds in that account are then 
used by the Libyan authorities to make investments in 
Zimbabwe.  The only investments made so far, however, have 
been the purchase of Commercial Bank of Zimbabwe shares worth 
U.S. $6.7 million.  When Zimbabwe was unable to settle its 
debt of U.S. $43 million on June 22, Tamoil suspended all 
deliveries of petroleum products to NOCZIM.  (Note:  we do 
not know whether this debt has subsequently been paid.  End 
note.)  Until that amount is paid, "it would be difficult for 
NOCZIM to negotiate for the renewal of the U.S. $90 million 
Financing Facility through the Libyan Arab Foreign Bank." 
(Note: A separate contact informed us that the GOZ delegation 
that traveled to Tripoli in late June to renegotiate the 
facility encountered a frosty reception.  End note.) 
 
Air Zimbabwe/Eximbank 
--------------------- 
 
9.  (C) Makoni notes the agreement reached in May among his 
Ministry, the Ministry of Transport and Communication, and 
Air Zimbabwe to repay Eximbank for the airline's two Boeing 
767's -- U.S. $5 million each in April and May, U.S. $6 
million each in June, July, and August, and a final U.S. $4.6 
million payment in September.  Makoni warns that the aircraft 
will be impounded in the event of non-payment, and reports 
that, in apparent anticipation of such action, "creditors" 
have written to the GOZ advising of their intention to send 
inspectors to examine the aircraft. 
 
Zimbabwe's embassies 
-------------------- 
 
10.  (C) The GOZ continues to have serious difficulties in 
covering the costs of its overseas diplomatic missions.  A 
U.S.$2 million payment was made in May to cover a portion of 
costs incurred in January, while an additional U.S. $2.1 
million was disbursed in June to cover a portion of January 
and February costs.  Makoni stresses that "the situation at 
embassies is now very critical and there is urgent need to 
pay another U.S. $4 million." 
 
Medicines/Health 
---------------- 
 
11.  (C) The GOZ has been unable to fulfill its committment 
to allocate U.S. $2 million every month to import drugs and 
health equipment, due to the forex shortage.   A total of 
only U.S. $3.5 million has been allocated for this purpose 
since January.  The shortage of medicines and health 
equipment has, according to Makoni, "crippled the health 
delivery system." 
 
Cashflow 
-------- 
 
12.  (C) Zimbabwe's foreign exchange requirements between 
April 2002 and March 2003, according to Makoni, will amount 
to U.S. $1.15 billion, but the supply is expected to be only 
U.S. $486.4 million.  The consequent shortfall of $660 
million will result in critical shortages of essential inputs 
or further build up in external payment arrears. 
 
External Payment Arrears -- IFI's and other key donors 
--------------------------------------------- --------- 
 
13.  (C) Zimbabwe continues to accumulate arrears to 
multilateral financial institutions.  As of mid-June, arrears 
to the IMF total U.S. $131.3 million; to the World Bank, U.S. 
$130.9 million; and to the ADB, U.S. $146.3 million.  In 
addition, there are outstanding payments to creditors "likely 
to disburse," such as Badea 
(U.S. $1.5 million for telecommunications), the Kuwait Fund 
(U.S. $500,000 for road improvements); China (U.S. $2.6 
million for defense); and IFAD (U.S. $2.2 million for 
agricultural assistance). 
 
Impact on the Economy 
--------------------- 
 
14.  (C) Makoni concludes by emphasizing that the 
unavailability of forex has worsened shortages of raw 
materials, machinery and equipment, and chemicals. 
Consequently, production in the key sectors -- agriculture, 
manufacturing, mining, and tourism -- is severely 
constrained, undermining the capacity of the economy to 
generate foreign exchange.  This cycle could be exacerbated 
if fuel and electricity supplies are reduced due to 
non-clearance of arrears.  The forex shortage will increase 
the difficulty of obtaining fertilizers and other 
agricultural inputs, casting doubt on the success of the 
resettlement program.  It will also further constrain service 
delivery in the health sector; shortages of chemicals for 
treating water, for instance, are "already posing a major 
health hazard." 
 
End Excerpts from Makoni letter. 
 
Comment 
------- 
 
15.  (C) Makoni has provided a sobering picture of the 
devastation wrought by the Mugabe regime's harebrained 
economic mismanagement.  The letter confirms that the Finance 
Minister is as frank in private with his ruling party 
colleagues as he is in public.    It also confirms that GOZ 
decision-makers are well aware of the deleterious impact of 
their policies.  Growing realization of the potentially 
catastrophic consequences of the forex shortage could explain 
recent moves by the Reserve Bank to crack down on bureaux de 
change and other legitimate institutions who deal in the 
parallel currency market.  Further aggressive GOZ regulatory 
efforts, however, could force parallel rate cash flows to 
such legitimate institutions into the black market. 
 
16.  (C) Please strictly protect the fact that we have a copy 
of Makoni's letter, as it was not intended for circulation 
outside of Cabinet.  In addition, the well-respected Makoni 
is reportedly considered by some of his more moderate ruling 
party colleagues as a successor to Mugabe, but publication of 
the letter's contents could be used against him by other -- 
less palatable -- pretenders to the throne. 
 
 
 
 
SULLIVAN