US embassy cable - 02HARARE2118

UNCLAS HARARE 002118 
 
SIPDIS 
 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
LONDON FOR CGURNEY 
PARIS FOR CNEARY 
NAIROBI FOR PFLAUMER 
 
E.O. 12958: N/A 
TAGS: EAGR, EFIN, ECON, ZI 
SUBJECT: GOZ TO STRONG-ARM PENSION FUNDS FOR FINANCIAL 
SUPPORT 
 
 
1. Summary.  The GOZ is reportedly planning to issue Zim $30 
billion in bonds, and require pension plans to buy them, in 
order to finance the inadequately funded land reform program. 
 Between the shrinking membership paying in to pension funds, 
the decreasing interest rates, and the escalating inflation 
rate, the result is that the GOZ is confiscating private 
capital in order to prop up its bankrupt resettlement 
program.  Estimates of the full amount needed to finance land 
reform vary from at least Zim $160 billion to more than Zim 
$300 billion (between US $232 million and $435 million at the 
parallel rate).  To date, the GOZ has guaranteed $8.5 billion 
for the purchase of inputs, with banks supposedly pledging to 
match that amount.  Although the government-controlled 
newspaper cites analysts as saying that pension funds have 
sufficient cash balances to purchase the funds, private 
economists state such projections are wildly inaccurate.  In 
any event, the employees of Zimbabwe, both past and present, 
are now being forced to subsidize the GOZ's self-aggrandizing 
venture with their life's savings.  End summary. 
 
2. Pension funds are one of the most formalized savings 
institutions in Zimbabwe.  By law, every employee in Zimbabwe 
must belong to at least one pension fund -- employees are 
required to direct a portion of their earnings toward their 
eventual retirement income.  For many years, the government 
-- initially under UDI and subsequently under the GOZ -- has 
mandated that private pension funds invest in government by 
purchasing various treasury bills, and maintaining a 
specified proportion of government assets as a "prescribed 
asset ratio" in relation to their overall portfolios.  Under 
the UDI government, the prescribed asset ratio was 60% of 
investments; currently the prescribed asset ratio has 
decreased to 45% of investments. 
 
3. Historically, the prescribed asset ratio was not a 
liability to the big pension fund companies since the  bills 
paid interest at or about the rate of inflation, returning 
approximately 60% interest in January 2001.  However, during 
the past ten years various politicians have looked with envy 
at the "commanding heights of the economy," symbolized by the 
impressive buildings bearing the names of private pension 
funds such as Old Mutual and Southampton, and schemed to gain 
control of the substantial monies deposited with the private 
institutions.  Subsequently, around January 2001, the GOZ 
began to exercise its ability to manipulate its profit margin 
by reducing the rate of return on new bond issues.  With the 
backing of the prescribed asset ratio guaranteeing a captive 
market, the Reserve Bank of Zimbabwe (RBZ) decreased the rate 
of return on treasury bills to 11%, slowly inching the level 
back up to its current rate of 25%.  In conjunction with the 
present rate of inflation -- 135% for the month of August -- 
this is resulting in a negative real interest rate of 110%. 
Since the economic meltdown has built over the last two 
years, the pension funds have steadily been eroding their 
capital base in order to continue purchasing the mandatory 
treasury bills and thus financing various GOZ projects. 
 
4. Comment.  Although some analysts opine that the pension 
funds have the cash reserves needed to fund this program, 
other economists state that pension funds are highly unlikely 
to have enough liquid assets to underwrite such an 
undertaking.  Rather, one highly respected local economist 
speculates that the only way pension funds will be able to 
buy into the new bond issue will be by selling off capital 
assets.  In the past, the RBZ has bought up to Zim $21 
billion of its own treasury bills using its own cash reserves 
-- in short, lending money to to the GOZ.  Even if the RBZ 
funds this initiative directly, either by using its own 
reserves or printing new money, this will result in further 
inflationary pressure.   This economist forecasts that 
inflation is likely to rise to the 200% level by the end of 
2002, and could potentially reach 1000% by year end 2003 
unless drastic macroeconomic corrective measures are 
undertaken.  This paints a dismal picture whereby pensioners 
receive funds -- if they receive them at all -- equal to a 
fraction of the money deposited, and a fraction of the money 
required for survival.  As one retiree stated, although he 
receives Zim $20,000 monthly from his pension fund, that 
amount "won't even buy dog food" in today's economy.  If it 
was not for the income from his small consulting business, he 
would be among the growing population of pensioners wondering 
where his next meal was coming from.  End comment. 
 
SULLIVAN