US embassy cable - 02HARARE2172

UNCLAS SECTION 01 OF 02 HARARE 002172 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
USDOC FOR 2037 DIEMOND 
PASS USTR ROSA WHITAKER 
TREASURY FOR ED BARBER AND C WILKINSON 
USAID FOR MARJORIE COPSON 
 
E. O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, PGOV, ZI 
SUBJECT:  Zimbabwe's Economy: Hardly a Pulse 
 
 
Sensitive but unclassified.  Protect accordingly. 
 
1. (SBU) Summary: Robert Mugabe's government continues an 
assault on macroeconomics and private property.  Without 
credible monetary and exchange policy, the country will 
only plunge more deeply into recession.  End Summary. 
 
5 Years of Ruinous Policy 
------------------------- 
2. (U) Consider these ominous indicators: 
 
                         1998      2002 (est)     change 
                         ----      ----------     ------ 
Real GDP (US$ billions)    6.3         4.1        -  35% 
Arrears (US$ millions)    95       1,635          +1700% 
FDI (US$ millions)       444           3          -  99% 
M3 (Z$ billions)          57         495          + 870% 
(broad money supply) 
 
The numbers, which fluctuate considerably due to 
methodology, tell the story of a breathtaking 5-year 
tumble, exacerbated by external shocks but brought about 
by economic mismanagement. 
 
3. (U) In fact, the government has snubbed macroeconomic 
solutions at every turn.  It has: 
 
- expanded money supply aggressively to cover a widening 
revenue/expenditure gap. 
- instituted price controls. 
- cut interest on short-term bonds to one-fourth the 
inflation rate. 
- raided private pension funds by compelling them to buy 
these money-losing securities. 
- maintained an official exchange that is now just one- 
thirteenth the parallel rate. 
- fired Finance Minister Simba Makoni, a rare official 
voice for spending cuts and devaluation. 
 
4. (U) The results are unsurprising.  Monetary expansion 
caused rampant inflation (currently at 135 percent by 
official estimates).  Price controls triggered shortages, 
cosmetic repackaging and black-market profiteering.  Low 
interest on bonds drove investors into equity and housing 
markets, which are in turn booming. Pension funds 
reluctantly underwrote government spending and debt 
servicing, depleting the country's overall savings (down 
from 25 to 7 percent of GDP since 1997) and impoverishing 
future retirees.  And the preposterous official exchange 
has strangled much private sector activity - and sparked 
innumerable rent-seeking schemes. 
 
An Opportunity Lost for Export-Driven Growth 
-------------------------------------------- 
5. (U) Tragically, the country has failed to make use of 
its weak currency, a formidable trade advantage, even vis- 
a-vis the depreciated South African rand.  Falling 
exports have kept current accounts in deficit.  Efforts 
to soften the currency burden on exporters - through 
lower lending rates and partial devaluations for export 
earnings - have made little difference.  Over 80 percent 
of commercial activity already takes place at the 
parallel rate.  Yet companies risk sanction for parallel 
market conversions and often halt production rather than 
submit to the official rate.  The government has also 
increased licensing fees for exchange agents by 10-fold, 
adding another cost to the export sector. 
 
Comment 
------- 
6. (SBU) We see no prospect of recovery without a 
sweeping policy overhaul.  Monetary growth, runaway 
spending, price controls and the official exchange rate 
all pound away at GDP.  As it stands, the government is 
forecasting a further 5 percent retraction in 2003 while 
private economists expect 5-10 percent.  The 10-percent 
worst-case scenario would make for a cumulative 41 
percent real GDP decline by the close of 2003. 
 
7. (SBU) To climb out of this deepening pit, the country 
will need a stable business climate, tighter monetary 
control and plausible exchange regime.  The government 
will have to broadly cut spending (deficit is now over 15 
percent of GDP) and overcome its ideological disdain for 
private property. (At present, the government is not even 
willing to issue titles on the expropriated farmland it 
is doling out to supporters.)  By selling off 
underperforming parastatals, it would raise needed forex 
to service external arrears.  Such a change in policy 
would give the GoZ leverage to resume dialogue with the 
World Bank and International Monetary Fund, and seek 
better access for exports to the U.S. and Europe.  While 
the above scenario - or some variation - may be 
Zimbabwe's eventual recovery scenario, its enactment is 
nowhere on the horizon. 
 
Sullivan